These 4 Measures Indicate That GL TechLtd (SZSE:300480) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies GL Tech Co.,Ltd (SZSE:300480) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GL TechLtd

How Much Debt Does GL TechLtd Carry?

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. However, it does have CN¥554.7m in cash offsetting this, leading to net cash of CN¥144.6m.

How Healthy Is GL TechLtd's Balance Sheet?

We can see from the most recent balance sheet that GL TechLtd had liabilities of CN¥177.7m falling due within a year, and liabilities of CN¥437.9m due beyond that. On the other hand, it had cash of CN¥554.7m and CN¥389.4m worth of receivables due within a year. So it actually has 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. Succinctly put, GL TechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, GL TechLtd's EBIT fell a jaw-dropping 91% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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. 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 that may be a result of expenditure for growth, it does make the debt far 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¥144.6m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about GL TechLtd's balance sheet. 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. To that end, you should be aware of the 1 warning sign we've spotted with GL TechLtd .

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.