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.' 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. Importantly, COL Group Co.,Ltd. (SZSE:300364) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for COL GroupLtd
What Is COL GroupLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that COL GroupLtd had CN¥139.5m of debt in September 2023, down from CN¥251.0m, one year before. But on the other hand it also has CN¥179.1m in cash, leading to a CN¥39.6m net cash position.
How Strong Is COL GroupLtd's Balance Sheet?
We can see from the most recent balance sheet that COL GroupLtd had liabilities of CN¥410.1m falling due within a year, and liabilities of CN¥15.6m due beyond that. Offsetting these obligations, it had cash of CN¥179.1m as well as receivables valued at CN¥151.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥95.2m.
This state of affairs indicates that COL GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥15.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, COL GroupLtd 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 ultimately the future profitability of the business will decide if COL 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.
In the last year COL GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.5%, 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 COL GroupLtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that COL GroupLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥232m and booked a CN¥236m accounting loss. With only CN¥39.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 2 warning signs for COL GroupLtd that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.