Here's Why Gotion High-techLtd (SZSE:002074) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Gotion High-tech Co.,Ltd. (SZSE:002074) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gotion High-techLtd

What Is Gotion High-techLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Gotion High-techLtd had debt of CN¥32.5b, up from CN¥20.9b in one year. However, because it has a cash reserve of CN¥18.6b, its net debt is less, at about CN¥13.9b.

A Look At Gotion High-techLtd's Liabilities

According to the last reported balance sheet, Gotion High-techLtd had liabilities of CN¥40.3b due within 12 months, and liabilities of CN¥21.6b due beyond 12 months. On the other hand, it had cash of CN¥18.6b and CN¥14.3b worth of receivables due within a year. So its liabilities total CN¥29.0b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥36.3b, so it does suggest shareholders should keep an eye on Gotion High-techLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Gotion High-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.

Over 12 months, Gotion High-techLtd reported revenue of CN¥30b, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Gotion High-techLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥169m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥11b of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should be aware of the 2 warning signs we've spotted with Gotion High-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.