David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ccoop Group Co., Ltd (SZSE:000564) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ccoop Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ccoop Group had CN¥5.44b of debt in September 2024, down from CN¥6.49b, one year before. However, because it has a cash reserve of CN¥1.88b, its net debt is less, at about CN¥3.56b.

How Healthy Is Ccoop Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ccoop Group had liabilities of CN¥4.18b due within 12 months and liabilities of CN¥10.2b due beyond that. On the other hand, it had cash of CN¥1.88b and CN¥274.0m worth of receivables due within a year. So it has liabilities totalling CN¥12.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ccoop Group has a market capitalization of CN¥60.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Ccoop 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 Ccoop Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.6%, to CN¥1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Ccoop Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥810m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥411m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Be aware that Ccoop Group is showing 2 warning signs in our investment analysis , you should know about...

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.