GL TechLtd (SZSE:300480) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, GL Tech Co.,Ltd (SZSE:300480) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for GL TechLtd

What Is GL TechLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 GL TechLtd had debt of CN¥410.1m, up from CN¥371.5m in one year. But on the other hand it also has CN¥554.7m in cash, leading to a CN¥144.6m net cash position.

How Strong Is GL TechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GL TechLtd had liabilities of CN¥177.7m due within 12 months and liabilities of CN¥437.9m due beyond that. Offsetting these obligations, it had cash of CN¥554.7m as well as receivables valued at CN¥389.4m due within 12 months. So it can boast CN¥328.5m more liquid assets than total liabilities.

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

Shareholders should be aware that GL TechLtd's EBIT was down 91% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 GL TechLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. While GL TechLtd 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. During the last three years, GL TechLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case GL TechLtd has CN¥144.6m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about GL TechLtd's balance sheet. Even though GL TechLtd lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.