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 can see that GrandiT Co., Ltd. (SHSE:688549) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does GrandiT Carry?

The image below, which you can click on for greater detail, shows that GrandiT had debt of CN¥183.5m at the end of March 2024, a reduction from CN¥276.9m over a year. But on the other hand it also has CN¥1.73b in cash, leading to a CN¥1.54b net cash position.

How Strong Is GrandiT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GrandiT had liabilities of CN¥659.3m due within 12 months and liabilities of CN¥179.4m due beyond that. On the other hand, it had cash of CN¥1.73b and CN¥343.9m worth of receivables due within a year. So it actually has CN¥1.23b more liquid assets than total liabilities.

This surplus suggests that GrandiT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that GrandiT has more cash than debt is arguably a good indication that 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 GrandiT 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 GrandiT wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥923m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is GrandiT?

Although GrandiT had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥23m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 instance, we've identified 1 warning sign for GrandiT that you should be aware of.

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.