Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Glarun Technology Co.,Ltd (SHSE:600562) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Glarun TechnologyLtd's Debt?

As you can see below, at the end of March 2024, Glarun TechnologyLtd had CN¥129.1m of debt, up from CN¥23.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.30b in cash, so it actually has CN¥1.17b net cash.

A Look At Glarun TechnologyLtd's Liabilities

According to the last reported balance sheet, Glarun TechnologyLtd had liabilities of CN¥3.26b due within 12 months, and liabilities of CN¥43.1m due beyond 12 months. On the other hand, it had cash of CN¥1.30b and CN¥4.37b worth of receivables due within a year. So it can boast CN¥2.37b more liquid assets than total liabilities.

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

The good news is that Glarun TechnologyLtd has increased its EBIT by 5.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Glarun TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Glarun TechnologyLtd 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. Looking at the most recent three years, Glarun TechnologyLtd recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Glarun TechnologyLtd has CN¥1.17b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 5.2% over the last year. So we don't have any problem with Glarun TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Glarun TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.