Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Giant Network Group Co., Ltd. (SZSE:002558) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Giant Network Group Carry?

As you can see below, Giant Network Group had CN¥637.5m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥2.06b in cash offsetting this, leading to net cash of CN¥1.43b.

How Strong Is Giant Network Group's Balance Sheet?

According to the last reported balance sheet, Giant Network Group had liabilities of CN¥1.58b due within 12 months, and liabilities of CN¥66.6m due beyond 12 months. On the other hand, it had cash of CN¥2.06b and CN¥179.5m worth of receivables due within a year. So it actually has CN¥594.0m 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. Succinctly put, Giant Network Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Giant Network Group has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 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. While Giant Network Group 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. Happily for any shareholders, Giant Network Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Giant Network Group has CN¥1.43b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in CN¥910m. So we don't think Giant Network Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Giant Network 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.