Here's Why GL TechLtd (SZSE:300480) Can Manage Its Debt Responsibly

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. We can see that GL Tech Co.,Ltd (SZSE:300480) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GL TechLtd

What Is GL TechLtd's Debt?

As you can see below, at the end of March 2024, GL TechLtd had CN¥401.8m of debt, up from CN¥50.8m a year ago. Click the image for more detail. However, it does have CN¥658.0m in cash offsetting this, leading to net cash of CN¥256.3m.

A Look At GL TechLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that GL TechLtd had liabilities of CN¥175.9m due within 12 months and liabilities of CN¥435.5m due beyond that. On the other hand, it had cash of CN¥658.0m and CN¥404.0m worth of receivables due within a year. So it actually has CN¥450.7m 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. Succinctly put, GL TechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, GL TechLtd saw its EBIT drop by 8.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine GL TechLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. GL TechLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, GL TechLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that GL TechLtd has net cash of CN¥256.3m, as well as more liquid assets than liabilities. So we don't have any problem with GL TechLtd's use of debt. 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 GL TechLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think 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.