Goody Science and Technology (SZSE:002694) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Goody Science and Technology Co., Ltd. (SZSE:002694) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Goody Science and Technology

What Is Goody Science and Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Goody Science and Technology had debt of CN¥29.3m at the end of September 2024, a reduction from CN¥202.3m over a year. But it also has CN¥170.4m in cash to offset that, meaning it has CN¥141.1m net cash.

How Healthy Is Goody Science and Technology's Balance Sheet?

According to the last reported balance sheet, Goody Science and Technology had liabilities of CN¥613.8m due within 12 months, and liabilities of CN¥42.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥170.4m as well as receivables valued at CN¥158.0m due within 12 months. So its liabilities total CN¥327.5m more than the combination of its cash and short-term receivables.

Since publicly traded Goody Science and Technology shares are worth a total of CN¥4.34b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Goody Science and Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Goody Science and Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Goody Science and Technology had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to CN¥851m. That's not what we would hope to see.

So How Risky Is Goody Science and Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Goody Science and Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥226m of cash and made a loss of CN¥105m. Given it only has net cash of CN¥141.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Goody Science and Technology (at least 1 which makes us a bit uncomfortable) , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.