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, Gosuncn Technology Group Co., Ltd. (SZSE:300098) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Gosuncn Technology Group Carry?
The image below, which you can click on for greater detail, shows that at September 2024 Gosuncn Technology Group had debt of CN¥437.0m, up from CN¥413.1m in one year. However, because it has a cash reserve of CN¥418.6m, its net debt is less, at about CN¥18.4m.
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¥400.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥418.6m as well as receivables valued at CN¥1.91b due within 12 months. So it actually has CN¥330.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Gosuncn Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Gosuncn Technology Group has virtually no net debt, 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 it is future earnings, more than anything, that will determine Gosuncn Technology Group's ability to maintain a healthy balance sheet going forward. 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¥1.6b, which is a fall of 17%. That's not what we would hope to see.
Caveat Emptor
Not only did Gosuncn Technology Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥182m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 1 warning sign we've spotted with Gosuncn Technology Group .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
