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 note that Capitalonline Data Service Co., Ltd. (SZSE:300846) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Capitalonline Data Service's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Capitalonline Data Service had debt of CN¥607.1m, up from CN¥581.5m in one year. However, its balance sheet shows it holds CN¥610.3m in cash, so it actually has CN¥3.19m net cash.

How Healthy Is Capitalonline Data Service's Balance Sheet?

The latest balance sheet data shows that Capitalonline Data Service had liabilities of CN¥1.00b due within a year, and liabilities of CN¥107.3m falling due after that. On the other hand, it had cash of CN¥610.3m and CN¥356.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥142.9m.

Given Capitalonline Data Service has a market capitalization of CN¥5.52b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Capitalonline Data Service also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Capitalonline Data Service's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Capitalonline Data Service wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to CN¥1.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Capitalonline Data Service?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Capitalonline Data Service had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥88m of cash and made a loss of CN¥329m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.19m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 example, we've discovered 3 warning signs for Capitalonline Data Service (2 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.