We Think Glarun TechnologyLtd (SHSE:600562) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Glarun Technology Co.,Ltd (SHSE:600562) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Glarun TechnologyLtd

What Is Glarun TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Glarun TechnologyLtd had CN¥129.1m of debt, an increase on CN¥23.0m, over one year. But it also has CN¥1.30b in cash to offset that, meaning it has CN¥1.17b net cash.

How Strong Is Glarun TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Glarun TechnologyLtd had liabilities of CN¥3.26b due within 12 months, and liabilities of CN¥43.1m due beyond 12 months. On the other hand, it had cash of CN¥1.30b and CN¥4.37b worth of receivables due within a year. So it actually has CN¥2.37b 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.

Fortunately, Glarun TechnologyLtd grew its EBIT by 5.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Glarun TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, Glarun TechnologyLtd's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying 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¥1.17b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 5.2% in the last twelve months. So we are not troubled with Glarun TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Glarun TechnologyLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.