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 Googol Technology Co., Ltd. (SZSE:301510) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Googol Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Googol Technology had debt of CN¥12.6m at the end of December 2023, a reduction from CN¥24.9m over a year. However, its balance sheet shows it holds CN¥431.1m in cash, so it actually has CN¥418.4m net cash.

A Look At Googol Technology's Liabilities

According to the last reported balance sheet, Googol Technology had liabilities of CN¥112.4m due within 12 months, and liabilities of CN¥8.75m due beyond 12 months. Offsetting this, it had CN¥431.1m in cash and CN¥231.4m in receivables that were due within 12 months. So it actually has CN¥541.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Googol Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Googol Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Googol Technology has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Googol Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Googol Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Googol Technology recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Googol Technology has net cash of CN¥418.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So is Googol Technology's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Googol Technology that 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.