Warren Buffett famously said, '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 Goldenmax International Group Ltd. (SZSE:002636) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that Goldenmax International Group had CN¥45.0m of debt in September 2023, down from CN¥65.0m, one year before. But on the other hand it also has CN¥1.08b in cash, leading to a CN¥1.03b net cash position.

How Healthy Is Goldenmax International Group's Balance Sheet?

The latest balance sheet data shows that Goldenmax International Group had liabilities of CN¥2.32b due within a year, and liabilities of CN¥80.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.08b as well as receivables valued at CN¥1.31b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Goldenmax International Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.68b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Goldenmax International Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Goldenmax International 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.

In the last year Goldenmax International Group had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥3.7b. We would much 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 booked a paper profit of CN¥52m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Goldenmax International Group (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.