David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, GL Tech Co.,Ltd (SZSE:300480) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for GL TechLtd
How Much Debt Does GL TechLtd Carry?
The image below, which you can click on for greater detail, shows that at September 2023 GL TechLtd had debt of CN¥371.5m, up from CN¥180.9m in one year. However, its balance sheet shows it holds CN¥685.8m in cash, so it actually has CN¥314.3m net cash.
How Strong Is GL TechLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that GL TechLtd had liabilities of CN¥200.6m due within 12 months and liabilities of CN¥364.2m due beyond that. Offsetting these obligations, it had cash of CN¥685.8m as well as receivables valued at CN¥517.7m due within 12 months. So it actually has CN¥638.8m more liquid assets than total liabilities.
This surplus suggests that GL TechLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GL TechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, GL TechLtd saw its EBIT drop by 8.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if GL TechLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While GL TechLtd 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. During the last three years, GL TechLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that GL TechLtd has net cash of CN¥314.3m, as well as more liquid assets than liabilities. So we don't have any problem with GL TechLtd'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. To that end, you should be aware of the 3 warning signs we've spotted with GL TechLtd .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.