The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Giant Network Group Co., Ltd. (SZSE:002558) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Giant Network Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Giant Network Group had CN¥627.5m of debt, an increase on CN¥586.6m, over one year. However, it does have CN¥2.26b in cash offsetting this, leading to net cash of CN¥1.63b.

A Look At Giant Network Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Giant Network Group had liabilities of CN¥1.64b due within 12 months and liabilities of CN¥70.2m due beyond that. Offsetting this, it had CN¥2.26b in cash and CN¥187.2m in receivables that were due within 12 months. So it can boast CN¥743.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Giant Network Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Giant Network Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Giant Network Group grew its EBIT by 132% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Giant Network Group'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. Giant Network Group 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 last three years, Giant Network Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Giant Network Group has net cash of CN¥1.63b, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't think Giant Network Group's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Giant Network Group you should know about.

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.