Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Saturday Co.,Ltd (SZSE:002291) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SaturdayLtd

How Much Debt Does SaturdayLtd Carry?

You can click the graphic below for the historical numbers, but it shows that SaturdayLtd had CN¥681.5m of debt in March 2022, down from CN¥1.56b, one year before. However, its balance sheet shows it holds CN¥1.79b in cash, so it actually has CN¥1.11b net cash.

A Look At SaturdayLtd's Liabilities

The latest balance sheet data shows that SaturdayLtd had liabilities of CN¥1.39b due within a year, and liabilities of CN¥83.6m falling due after that. On the other hand, it had cash of CN¥1.79b and CN¥1.28b worth of receivables due within a year. So it can boast CN¥1.61b more liquid assets than total liabilities.

This short term liquidity is a sign that SaturdayLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SaturdayLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SaturdayLtd 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.

In the last year SaturdayLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to CN¥3.1b. With any luck the company will be able to grow its way to profitability.

So How Risky Is SaturdayLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that SaturdayLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥403m of cash and made a loss of CN¥623m. With only CN¥1.11b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, SaturdayLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SaturdayLtd is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.