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 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. We can see that Gosuncn Technology Group Co., Ltd. (SZSE:300098) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Gosuncn Technology Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Gosuncn Technology Group had CN¥370.0m of debt, an increase on CN¥355.1m, over one year. However, it does have CN¥463.8m in cash offsetting this, leading to net cash of CN¥93.8m.
How Healthy Is Gosuncn Technology Group's Balance Sheet?
According to the last reported balance sheet, Gosuncn Technology Group had liabilities of CN¥1.59b due within 12 months, and liabilities of CN¥393.5m due beyond 12 months. Offsetting this, it had CN¥463.8m in cash and CN¥2.04b in receivables that were due within 12 months. So it can boast CN¥516.7m more liquid assets than total liabilities.
This surplus suggests that Gosuncn Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gosuncn Technology Group boasts net cash, so it's fair to say it does not have a heavy 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 Gosuncn Technology Group 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.
Over 12 months, Gosuncn Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 23%. To be frank that doesn't bode well.
So How Risky Is Gosuncn Technology Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Gosuncn Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥48m of cash and made a loss of CN¥73m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥93.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Gosuncn Technology Group 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.
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