Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Goldlok Holdings(Guangdong) Co.,Ltd. (SZSE:002348) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Goldlok Holdings(Guangdong)Ltd

How Much Debt Does Goldlok Holdings(Guangdong)Ltd Carry?

As you can see below, Goldlok Holdings(Guangdong)Ltd had CN¥91.2m of debt at March 2023, down from CN¥117.1m a year prior. However, it does have CN¥12.5m in cash offsetting this, leading to net debt of about CN¥78.7m.

How Strong Is Goldlok Holdings(Guangdong)Ltd's Balance Sheet?

The latest balance sheet data shows that Goldlok Holdings(Guangdong)Ltd had liabilities of CN¥189.2m due within a year, and liabilities of CN¥45.3m falling due after that. Offsetting these obligations, it had cash of CN¥12.5m as well as receivables valued at CN¥156.0m due within 12 months. So it has liabilities totalling CN¥66.0m more than its cash and near-term receivables, combined.

Having regard to Goldlok Holdings(Guangdong)Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.47b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Goldlok Holdings(Guangdong)Ltd'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 Goldlok Holdings(Guangdong)Ltd had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥294m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Goldlok Holdings(Guangdong)Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥32m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of CN¥50m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Goldlok Holdings(Guangdong)Ltd has 2 warning signs (and 1 which is potentially serious) we think 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.