Is Gosuncn Technology Group (SZSE:300098) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Gosuncn Technology Group Co., Ltd. (SZSE:300098) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gosuncn Technology Group

What Is Gosuncn Technology Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Gosuncn Technology Group had debt of CN¥370.0m, up from CN¥355.1m in one year. However, it does have CN¥463.8m in cash offsetting this, leading to net cash of CN¥93.8m.

How Strong Is Gosuncn Technology Group's Balance Sheet?

According to the last reported balance sheet, Gosuncn Technology Group had liabilities of CN¥1.59b due within 12 months, and liabilities of CN¥393.5m due beyond 12 months. On the other hand, it had cash of CN¥463.8m and CN¥2.04b worth of receivables due within a year. So it can boast CN¥516.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Gosuncn Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gosuncn Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Gosuncn Technology Group 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.

In the last year Gosuncn Technology Group had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥1.8b. That makes us nervous, to say the least.

So How Risky Is Gosuncn Technology Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Gosuncn Technology Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥48m of cash and made a loss of CN¥73m. But the saving grace is the CN¥93.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Gosuncn Technology Group has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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