We Think C&G Hi Tech (KOSDAQ:264660) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that C&G Hi Tech Co., Ltd (KOSDAQ:264660) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for C&G Hi Tech

What Is C&G Hi Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that C&G Hi Tech had ₩14.1b of debt in December 2023, down from ₩18.8b, one year before. But on the other hand it also has ₩58.1b in cash, leading to a ₩44.0b net cash position.

How Strong Is C&G Hi Tech's Balance Sheet?

The latest balance sheet data shows that C&G Hi Tech had liabilities of ₩45.4b due within a year, and liabilities of ₩3.94b falling due after that. On the other hand, it had cash of ₩58.1b and ₩9.45b worth of receivables due within a year. So it can boast ₩18.2b more liquid assets than total liabilities.

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

In fact C&G Hi Tech's saving grace is its low debt levels, because its EBIT has tanked 50% in the last twelve months. 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 C&G Hi Tech'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While C&G Hi Tech 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 three years, C&G Hi Tech created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case C&G Hi Tech has ₩44.0b in net cash and a decent-looking balance sheet. So we are not troubled with C&G Hi Tech's debt use. 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 4 warning signs for C&G Hi Tech (of which 1 can't be ignored!) you should know about.

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.