Is Glarun TechnologyLtd (SHSE:600562) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Glarun Technology Co.,Ltd (SHSE:600562) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Glarun TechnologyLtd

How Much Debt Does Glarun TechnologyLtd Carry?

As you can see below, Glarun TechnologyLtd had CN¥55.9m of debt at September 2024, down from CN¥99.6m a year prior. However, its balance sheet shows it holds CN¥667.1m in cash, so it actually has CN¥611.2m net cash.

A Look At Glarun TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Glarun TechnologyLtd had liabilities of CN¥2.86b due within 12 months and liabilities of CN¥66.1m due beyond that. Offsetting these obligations, it had cash of CN¥667.1m as well as receivables valued at CN¥4.68b due within 12 months. So it actually has CN¥2.42b more liquid assets than total liabilities.

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

While Glarun TechnologyLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Glarun 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 Glarun 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, Glarun TechnologyLtd reported free cash flow worth 7.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Glarun TechnologyLtd has CN¥611.2m in net cash and a decent-looking balance sheet. So we are not troubled with Glarun TechnologyLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Glarun TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.