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. We note that Geovis Technology Co.,Ltd (SHSE:688568) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
View our latest analysis for Geovis TechnologyLtd
What Is Geovis TechnologyLtd's Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Geovis TechnologyLtd had debt of CN„415.7m, up from CN„26.2m in one year. However, it does have CN„1.29b in cash offsetting this, leading to net cash of CN„872.2m.
How Strong Is Geovis TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Geovis TechnologyLtd had liabilities of CN„1.92b due within 12 months and liabilities of CN„136.7m due beyond that. On the other hand, it had cash of CN„1.29b and CN„2.52b worth of receivables due within a year. So it actually has CN„1.75b more liquid assets than total liabilities.
This short term liquidity is a sign that Geovis TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Geovis TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Geovis TechnologyLtd has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Geovis TechnologyLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Geovis TechnologyLtd 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, Geovis TechnologyLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Geovis TechnologyLtd has net cash of CN„872.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 51% year-on-year EBIT growth. So we don't have any problem with Geovis TechnologyLtd'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. Be aware that Geovis TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About SHSE:688568
Geovis TechnologyLtd
Engages in research, development, and industrialization of digital earth products for government, enterprises, and special and public fields in China.
High growth potential and good value.
