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 can see that Qingdao Haier Biomedical Co.,Ltd (SHSE:688139) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Qingdao Haier BiomedicalLtd's Debt?

As you can see below, at the end of March 2024, Qingdao Haier BiomedicalLtd had CN¥11.0m of debt, up from CN¥10.0m a year ago. Click the image for more detail. However, it does have CN¥2.00b in cash offsetting this, leading to net cash of CN¥1.99b.

How Healthy Is Qingdao Haier BiomedicalLtd's Balance Sheet?

The latest balance sheet data shows that Qingdao Haier BiomedicalLtd had liabilities of CN¥987.9m due within a year, and liabilities of CN¥142.4m falling due after that. Offsetting these obligations, it had cash of CN¥2.00b as well as receivables valued at CN¥356.0m due within 12 months. So it can boast CN¥1.23b more liquid assets than total liabilities.

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

It is just as well that Qingdao Haier BiomedicalLtd's load is not too heavy, because its EBIT was down 50% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Haier BiomedicalLtd 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. Qingdao Haier BiomedicalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Qingdao Haier BiomedicalLtd recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qingdao Haier BiomedicalLtd has CN¥1.99b in net cash and a decent-looking balance sheet. So we don't have any problem with Qingdao Haier BiomedicalLtd's use of debt. 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 example, we've discovered 1 warning sign for Qingdao Haier BiomedicalLtd that you should be aware of before investing here.

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.