Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies GDH Supertime Group Company Limited (SZSE:001338) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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 GDH Supertime Group Carry?

The image below, which you can click on for greater detail, shows that GDH Supertime Group had debt of CN¥535.3m at the end of June 2024, a reduction from CN¥807.2m over a year. However, it does have CN¥954.3m in cash offsetting this, leading to net cash of CN¥419.1m.

How Healthy Is GDH Supertime Group's Balance Sheet?

We can see from the most recent balance sheet that GDH Supertime Group had liabilities of CN¥1.10b falling due within a year, and liabilities of CN¥9.60m due beyond that. On the other hand, it had cash of CN¥954.3m and CN¥1.10b worth of receivables due within a year. So it can boast CN¥937.3m more liquid assets than total liabilities.

This surplus suggests that GDH Supertime 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. Succinctly put, GDH Supertime Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that GDH Supertime Group has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GDH Supertime Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While GDH Supertime 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, GDH Supertime Group actually produced more free cash flow than EBIT over the last three years. 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 we empathize with investors who find debt concerning, you should keep in mind that GDH Supertime Group has net cash of CN¥419.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.9b, being 964% of its EBIT. The bottom line is that we do not find GDH Supertime Group's debt levels at all concerning. 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. Be aware that GDH Supertime Group is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.