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 Qingdao Gaoce Technology Co., Ltd (SHSE:688556) 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Qingdao Gaoce Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Qingdao Gaoce Technology had CN¥524.7m of debt, an increase on CN¥384.1m, over one year. But it also has CN¥975.0m in cash to offset that, meaning it has CN¥450.3m net cash.

A Look At Qingdao Gaoce Technology's Liabilities

According to the last reported balance sheet, Qingdao Gaoce Technology had liabilities of CN¥3.20b due within 12 months, and liabilities of CN¥613.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥975.0m as well as receivables valued at CN¥3.28b due within 12 months. So it can boast CN¥432.6m more liquid assets than total liabilities.

This surplus suggests that Qingdao Gaoce Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Qingdao Gaoce Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Qingdao Gaoce Technology if management cannot prevent a repeat of the 76% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Qingdao Gaoce Technology 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 Qingdao Gaoce Technology 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, Qingdao Gaoce Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qingdao Gaoce Technology has net cash of CN¥450.3m, as well as more liquid assets than liabilities. So we are not troubled with Qingdao Gaoce Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Qingdao Gaoce Technology (including 1 which can't be ignored) .

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.