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 can see that Hemcheck Sweden AB (publ) (STO:HEMC) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Hemcheck Sweden

What Is Hemcheck Sweden's Net Debt?

The image below, which you can click on for greater detail, shows that Hemcheck Sweden had debt of kr1.49m at the end of March 2019, a reduction from kr2.37m over a year. However, it does have kr31.0m in cash offsetting this, leading to net cash of kr29.5m.

A Look At Hemcheck Sweden's Liabilities

We can see from the most recent balance sheet that Hemcheck Sweden had liabilities of kr3.28m falling due within a year, and liabilities of kr630.2k due beyond that. Offsetting these obligations, it had cash of kr31.0m as well as receivables valued at kr409.5k due within 12 months. So it can boast kr27.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hemcheck Sweden's balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Hemcheck Sweden has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Hemcheck Sweden'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 Hemcheck Sweden managed to grow its revenue by 34%, to kr4.4m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hemcheck Sweden?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hemcheck Sweden lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr13m and booked a kr5.4m accounting loss. However, it has net cash of kr31m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Hemcheck Sweden may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Hemcheck Sweden insider transactions.

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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.