Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Qunabox Group Limited (HKG:917) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Qunabox Group's Debt?

The image below, which you can click on for greater detail, shows that Qunabox Group had debt of CN¥342.6m at the end of June 2024, a reduction from CN¥1.35b over a year. But on the other hand it also has CN¥998.7m in cash, leading to a CN¥656.1m net cash position.

How Strong Is Qunabox Group's Balance Sheet?

We can see from the most recent balance sheet that Qunabox Group had liabilities of CN¥428.2m falling due within a year, and liabilities of CN¥15.4m due beyond that. Offsetting these obligations, it had cash of CN¥998.7m as well as receivables valued at CN¥506.3m due within 12 months. So it actually has CN¥1.06b more liquid assets than total liabilities.

This surplus suggests that Qunabox Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qunabox Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Qunabox Group grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Qunabox Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Qunabox Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Qunabox Group created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qunabox Group has CN¥656.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think Qunabox Group's use of debt is risky. Even though Qunabox Group lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.