Is Glarun TechnologyLtd (SHSE:600562) Using Too Much Debt?

Warren Buffett famously said, '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 Glarun Technology Co.,Ltd (SHSE:600562) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Glarun TechnologyLtd

What Is Glarun TechnologyLtd's Net Debt?

As you can see below, at the end of June 2024, Glarun TechnologyLtd had CN¥105.9m of debt, up from CN¥39.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.19b in cash, so it actually has CN¥1.08b net cash.

How Strong Is Glarun TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Glarun TechnologyLtd had liabilities of CN¥3.24b falling due within a year, and liabilities of CN¥50.6m due beyond that. On the other hand, it had cash of CN¥1.19b and CN¥4.62b worth of receivables due within a year. So it can boast CN¥2.52b more liquid assets than total liabilities.

This short term liquidity is a sign that Glarun TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Glarun TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Glarun TechnologyLtd grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Glarun TechnologyLtd has net cash of CN¥1.08b, as well as more liquid assets than liabilities. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Glarun TechnologyLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. 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.