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.' 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 COL Group Co.,Ltd. (SZSE:300364) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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.

How Much Debt Does COL GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 COL GroupLtd had debt of CN¥323.0m, up from CN¥139.0m in one year. However, because it has a cash reserve of CN¥215.4m, its net debt is less, at about CN¥107.6m.

How Healthy Is COL GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that COL GroupLtd had liabilities of CN¥534.3m due within 12 months and liabilities of CN¥112.7m due beyond that. On the other hand, it had cash of CN¥215.4m and CN¥149.8m worth of receivables due within a year. So it has liabilities totalling CN¥281.8m more than its cash and near-term receivables, combined.

Having regard to COL GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥19.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, COL GroupLtd has virtually no net debt, 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 future earnings, more than anything, that will determine COL GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, COL GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 7.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, COL GroupLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥106m. 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. Another cause for caution is that is bled CN¥111m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for COL GroupLtd you should be aware of.

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.