These 4 Measures Indicate That Global Standard Technology (KOSDAQ:083450) Is Using Debt Safely

Warren Buffett famously said, '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. We can see that Global Standard Technology, Limited (KOSDAQ:083450) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Global Standard Technology

What Is Global Standard Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Global Standard Technology had debt of ₩4.83b at the end of September 2020, a reduction from ₩5.87b over a year. But on the other hand it also has ₩45.1b in cash, leading to a ₩40.3b net cash position.

How Strong Is Global Standard Technology's Balance Sheet?

We can see from the most recent balance sheet that Global Standard Technology had liabilities of ₩23.1b falling due within a year, and liabilities of ₩4.42b due beyond that. Offsetting these obligations, it had cash of ₩45.1b as well as receivables valued at ₩20.3b due within 12 months. So it can boast ₩37.9b more liquid assets than total liabilities.

It's good to see that Global Standard Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Global Standard Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Global Standard Technology grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Global Standard Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Global Standard 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. Looking at the most recent three years, Global Standard Technology recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Global Standard Technology has ₩40.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Global Standard Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Global Standard Technology has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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