Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Goldenmax International Group Ltd. (SZSE:002636) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Goldenmax International Group's Debt?

As you can see below, Goldenmax International Group had CN¥45.0m of debt at March 2024, down from CN¥65.0m a year prior. But it also has CN¥1.43b in cash to offset that, meaning it has CN¥1.39b net cash.

How Healthy Is Goldenmax International Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Goldenmax International Group had liabilities of CN¥2.47b due within 12 months and liabilities of CN¥67.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.43b as well as receivables valued at CN¥1.21b due within 12 months. So it actually has CN¥99.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Goldenmax International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Goldenmax International Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Goldenmax International Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Goldenmax International Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Goldenmax International Group?

While Goldenmax International Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥186m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Goldenmax International Group (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com