Here's Why Guangdong Tloong Technology GroupLtd (SZSE:300063) Can Manage Its Debt Responsibly

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. As with many other companies Guangdong Tloong Technology Group Co.,Ltd (SZSE:300063) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Guangdong Tloong Technology GroupLtd

What Is Guangdong Tloong Technology GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangdong Tloong Technology GroupLtd had debt of CN¥723.5m at the end of June 2024, a reduction from CN¥809.1m over a year. However, it does have CN¥107.4m in cash offsetting this, leading to net debt of about CN¥616.1m.

How Strong Is Guangdong Tloong Technology GroupLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong Tloong Technology GroupLtd had liabilities of CN¥1.10b due within 12 months, and liabilities of CN¥201.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥107.4m as well as receivables valued at CN¥1.92b due within 12 months. So it actually has CN¥727.6m more liquid assets than total liabilities.

This surplus suggests that Guangdong Tloong Technology GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Guangdong Tloong Technology GroupLtd has a rather high debt to EBITDA ratio of 6.7 which suggests a meaningful debt load. However, its interest coverage of 6.7 is reasonably strong, which is a good sign. Shareholders should be aware that Guangdong Tloong Technology GroupLtd's EBIT was down 30% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Tloong Technology GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Guangdong Tloong Technology GroupLtd recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

We weren't impressed with Guangdong Tloong Technology GroupLtd's net debt to EBITDA, and its EBIT growth rate made us cautious. But like a ballerina ending on a perfect pirouette, it has not trouble converting EBIT to free cash flow. Considering this range of data points, we think Guangdong Tloong Technology GroupLtd is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Guangdong Tloong Technology GroupLtd you should be aware of, and 1 of them is a bit concerning.

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.