Is GL TechLtd (SZSE:300480) A Risky Investment?

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 can see that GL Tech Co.,Ltd (SZSE:300480) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 GL TechLtd had debt of CN¥371.5m, up from CN¥180.9m in one year. But on the other hand it also has CN¥685.8m in cash, leading to a CN¥314.3m net cash position.

A Look At GL TechLtd's Liabilities

The latest balance sheet data shows that GL TechLtd had liabilities of CN¥200.6m due within a year, and liabilities of CN¥364.2m falling due after that. Offsetting these obligations, it had cash of CN¥685.8m as well as receivables valued at CN¥517.7m due within 12 months. So it can boast CN¥638.8m more liquid assets than total liabilities.

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

On the other hand, GL TechLtd saw its EBIT drop by 8.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GL TechLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, GL TechLtd saw substantial negative free cash flow, in total. 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¥314.3m, as well as more liquid assets than liabilities. So we don't have any problem with GL TechLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for GL TechLtd 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.