GMO TECH (TSE:6026) Could Easily Take On More Debt

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 GMO TECH, Inc. (TSE:6026) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for GMO TECH

What Is GMO TECH's Net Debt?

The image below, which you can click on for greater detail, shows that GMO TECH had debt of JP¥245.0m at the end of June 2024, a reduction from JP¥315.0m over a year. However, its balance sheet shows it holds JP¥1.15b in cash, so it actually has JP¥904.0m net cash.

How Healthy Is GMO TECH's Balance Sheet?

We can see from the most recent balance sheet that GMO TECH had liabilities of JP¥1.38b falling due within a year, and liabilities of JP¥188.0m due beyond that. On the other hand, it had cash of JP¥1.15b and JP¥949.0m worth of receivables due within a year. So it can boast JP¥527.0m more liquid assets than total liabilities.

This surplus suggests that GMO TECH has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GMO TECH boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that GMO TECH grew its EBIT by 155% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is GMO TECH'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 company can only pay off debt with cold hard cash, not accounting profits. GMO TECH 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. Looking at the most recent two years, GMO TECH recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case GMO TECH has JP¥904.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 155% year-on-year EBIT growth. So is GMO TECH's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for GMO TECH (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.