Does GL-Carlink Technology Holding (HKG:2531) Have A Healthy Balance Sheet?

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. Importantly, GL-Carlink Technology Holding Limited (HKG:2531) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is GL-Carlink Technology Holding's Debt?

The chart below, which you can click on for greater detail, shows that GL-Carlink Technology Holding had CN¥42.3m in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds CN¥456.2m in cash, so it actually has CN¥413.9m net cash.

How Healthy Is GL-Carlink Technology Holding's Balance Sheet?

According to the last reported balance sheet, GL-Carlink Technology Holding had liabilities of CN¥226.8m due within 12 months, and liabilities of CN¥21.7m due beyond 12 months. On the other hand, it had cash of CN¥456.2m and CN¥137.9m worth of receivables due within a year. So it actually has CN¥345.6m more liquid assets than total liabilities.

This short term liquidity is a sign that GL-Carlink Technology Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GL-Carlink Technology Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for GL-Carlink Technology Holding

But the bad news is that GL-Carlink Technology Holding has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GL-Carlink Technology Holding will need earnings to service that debt. 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. GL-Carlink Technology Holding 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-Carlink Technology Holding reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that GL-Carlink Technology Holding has net cash of CN¥413.9m, as well as more liquid assets than liabilities. So we are not troubled with GL-Carlink Technology Holding's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GL-Carlink Technology Holding is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.