These 4 Measures Indicate That Giant Network Group (SZSE:002558) Is Using Debt Reasonably Well

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 Giant Network Group Co., Ltd. (SZSE:002558) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Giant Network Group

How Much Debt Does Giant Network Group Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Giant Network Group had debt of CN¥630.0m, up from CN¥603.0m in one year. However, it does have CN¥2.19b in cash offsetting this, leading to net cash of CN¥1.56b.

A Look At Giant Network Group's Liabilities

We can see from the most recent balance sheet that Giant Network Group had liabilities of CN¥1.46b falling due within a year, and liabilities of CN¥74.3m due beyond that. On the other hand, it had cash of CN¥2.19b and CN¥201.5m worth of receivables due within a year. So it actually has CN¥855.0m more liquid assets than total liabilities.

This surplus suggests that Giant Network Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Giant Network Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Giant Network Group saw its EBIT drop by 5.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Giant Network Group can strengthen its balance sheet over time. 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. Over the last three years, Giant Network Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Giant Network Group has CN¥1.56b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥883m, being 118% of its EBIT. 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 example - Giant Network Group has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.