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 can see that COL Group Co.,Ltd. (SZSE:300364) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is COL GroupLtd's Debt?

As you can see below, at the end of June 2024, COL GroupLtd had CN¥225.0m of debt, up from CN¥210.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥165.3m, its net debt is less, at about CN¥59.7m.

How Healthy Is COL GroupLtd's Balance Sheet?

The latest balance sheet data shows that COL GroupLtd had liabilities of CN¥472.7m due within a year, and liabilities of CN¥32.6m falling due after that. Offsetting these obligations, it had cash of CN¥165.3m as well as receivables valued at CN¥138.4m due within 12 months. So its liabilities total CN¥201.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that COL GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥13.9b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, COL GroupLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if COL GroupLtd 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.

In the last year COL GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to CN¥1.2b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months COL GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥56m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥172m of cash over the last year. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 2 warning signs we've spotted with COL GroupLtd (including 1 which is significant) .

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.