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, Toread Holdings Group Co., Ltd. (SZSE:300005) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Toread Holdings Group Carry?

As you can see below, at the end of March 2024, Toread Holdings Group had CN¥172.1m of debt, up from CN¥21.1m a year ago. Click the image for more detail. However, it does have CN¥1.14b in cash offsetting this, leading to net cash of CN¥967.6m.

A Look At Toread Holdings Group's Liabilities

The latest balance sheet data shows that Toread Holdings Group had liabilities of CN¥473.8m due within a year, and liabilities of CN¥183.3m falling due after that. On the other hand, it had cash of CN¥1.14b and CN¥322.4m worth of receivables due within a year. So it actually has CN¥805.0m more liquid assets than total liabilities.

This surplus suggests that Toread Holdings Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Toread Holdings Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Toread Holdings Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥79m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Toread Holdings Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Toread Holdings Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Toread Holdings Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Toread Holdings Group has CN¥967.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 399% of that EBIT to free cash flow, bringing in CN¥316m. So is Toread Holdings Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Toread Holdings Group, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.