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. We can see that Seres Group Co.,Ltd (SHSE:601127) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Seres GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Seres GroupLtd had debt of CN¥1.96b at the end of September 2024, a reduction from CN¥6.87b over a year. However, its balance sheet shows it holds CN¥53.2b in cash, so it actually has CN¥51.2b net cash.

How Strong Is Seres GroupLtd's Balance Sheet?

According to the last reported balance sheet, Seres GroupLtd had liabilities of CN¥76.2b due within 12 months, and liabilities of CN¥5.47b due beyond 12 months. On the other hand, it had cash of CN¥53.2b and CN¥4.80b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥23.6b.

Given Seres GroupLtd has a humongous market capitalization of CN¥200.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Seres GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Seres GroupLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.7b 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 Seres GroupLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Seres GroupLtd 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. Over the last year, Seres GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Seres GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥51.2b. And it impressed us with free cash flow of CN¥22b, being 1,306% of its EBIT. So is Seres GroupLtd'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 Seres GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.