David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, OFILM Group Co., Ltd. (SZSE:002456) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OFILM Group

How Much Debt Does OFILM Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 OFILM Group had CN¥8.42b of debt, an increase on CN¥4.43b, over one year. However, because it has a cash reserve of CN¥3.29b, its net debt is less, at about CN¥5.13b.

How Strong Is OFILM Group's Balance Sheet?

According to the last reported balance sheet, OFILM Group had liabilities of CN¥9.72b due within 12 months, and liabilities of CN¥4.05b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.29b as well as receivables valued at CN¥4.90b due within 12 months. So it has liabilities totalling CN¥5.57b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since OFILM Group has a market capitalization of CN¥16.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OFILM Group 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.

Over 12 months, OFILM Group made a loss at the EBIT level, and saw its revenue drop to CN¥16b, which is a fall of 42%. That makes us nervous, to say the least.

Caveat Emptor

Not only did OFILM Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥2.6b 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. For example, we would not want to see a repeat of last year's loss of CN¥5.9b. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for OFILM Group you should be aware of.

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.