We Think GRG Metrology & Test Group (SZSE:002967) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that GRG Metrology & Test Group Co., Ltd. (SZSE:002967) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GRG Metrology & Test Group

What Is GRG Metrology & Test Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 GRG Metrology & Test Group had CN¥1.38b of debt, an increase on CN¥965.6m, over one year. However, it does have CN¥1.41b in cash offsetting this, leading to net cash of CN¥31.5m.

How Strong Is GRG Metrology & Test Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GRG Metrology & Test Group had liabilities of CN¥1.68b due within 12 months and liabilities of CN¥669.3m due beyond that. Offsetting this, it had CN¥1.41b in cash and CN¥1.68b in receivables that were due within 12 months. So it actually has CN¥740.6m more liquid assets than total liabilities.

This surplus suggests that GRG Metrology & Test Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GRG Metrology & Test Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, GRG Metrology & Test Group grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GRG Metrology & Test 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. GRG Metrology & Test Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, GRG Metrology & Test Group basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case GRG Metrology & Test Group has CN¥31.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.6% over the last year. So we don't have any problem with GRG Metrology & Test Group's use of debt. 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. We've identified 1 warning sign with GRG Metrology & Test Group , and understanding them should be part of your investment process.

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.