These 4 Measures Indicate That Greentech Technology International (HKG:195) Is Using Debt Reasonably Well

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. We note that Greentech Technology International Limited (HKG:195) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Greentech Technology International

What Is Greentech Technology International's Net Debt?

The chart below, which you can click on for greater detail, shows that Greentech Technology International had HK$306.5m in debt in June 2022; about the same as the year before. However, it does have HK$443.8m in cash offsetting this, leading to net cash of HK$137.3m.

A Look At Greentech Technology International's Liabilities

We can see from the most recent balance sheet that Greentech Technology International had liabilities of HK$480.4m falling due within a year, and liabilities of HK$223.0m due beyond that. Offsetting these obligations, it had cash of HK$443.8m as well as receivables valued at HK$60.3m due within 12 months. So its liabilities total HK$199.3m more than the combination of its cash and short-term receivables.

Greentech Technology International has a market capitalization of HK$724.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Greentech Technology International boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Greentech Technology International grew its EBIT by 289% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Greentech Technology International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Greentech Technology International 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. In the last two years, Greentech Technology International created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Greentech Technology International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$137.3m. And it impressed us with its EBIT growth of 289% over the last year. So we are not troubled with Greentech Technology International's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Greentech Technology International that you should be aware of before investing here.

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.