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. As with many other companies Qifeng New Material Co., Ltd. (SZSE:002521) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Qifeng New Material's Debt?

As you can see below, at the end of June 2024, Qifeng New Material had CN¥591.9m of debt, up from CN¥550.5m a year ago. Click the image for more detail. However, it does have CN¥896.2m in cash offsetting this, leading to net cash of CN¥304.3m.

A Look At Qifeng New Material's Liabilities

The latest balance sheet data shows that Qifeng New Material had liabilities of CN¥1.45b due within a year, and liabilities of CN¥11.3m falling due after that. Offsetting this, it had CN¥896.2m in cash and CN¥1.43b in receivables that were due within 12 months. So it actually has CN¥872.4m more liquid assets than total liabilities.

This surplus suggests that Qifeng New Material 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, Qifeng New Material boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Qifeng New Material grew its EBIT by 1,639% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Qifeng New Material's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Qifeng New Material 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. Considering the last three years, Qifeng New Material actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qifeng New Material has net cash of CN¥304.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 1,639% over the last year. So we don't think Qifeng New Material's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Qifeng New Material , and understanding them should be part of your investment process.

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.