Is Googol Technology (SZSE:301510) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Googol Technology Co., Ltd. (SZSE:301510) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Googol Technology

How Much Debt Does Googol Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Googol Technology had CN¥15.4m of debt, an increase on CN¥5.88m, over one year. But on the other hand it also has CN¥326.4m in cash, leading to a CN¥310.9m net cash position.

How Strong Is Googol Technology's Balance Sheet?

According to the last reported balance sheet, Googol Technology had liabilities of CN¥126.2m due within 12 months, and liabilities of CN¥26.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥326.4m as well as receivables valued at CN¥259.1m due within 12 months. So it can boast CN¥432.4m more liquid assets than total liabilities.

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

It is just as well that Googol Technology's load is not too heavy, because its EBIT was down 38% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Googol Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Googol Technology 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, Googol Technology produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Googol Technology has CN¥310.9m in net cash and a decent-looking balance sheet. So we don't have any problem with Googol Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Googol Technology you should know about.

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.