These 4 Measures Indicate That Greenland Technologies Holding (NASDAQ:GTEC) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Greenland Technologies Holding Corporation (NASDAQ:GTEC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Greenland Technologies Holding

What Is Greenland Technologies Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Greenland Technologies Holding had US$10.5m of debt in September 2022, down from US$14.6m, one year before. However, it does have US$23.5m in cash offsetting this, leading to net cash of US$13.0m.

How Strong Is Greenland Technologies Holding's Balance Sheet?

We can see from the most recent balance sheet that Greenland Technologies Holding had liabilities of US$70.3m falling due within a year, and liabilities of US$4.12m due beyond that. Offsetting these obligations, it had cash of US$23.5m as well as receivables valued at US$85.4m due within 12 months. So it actually has US$34.6m more liquid assets than total liabilities.

This luscious liquidity implies that Greenland Technologies Holding's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Greenland Technologies Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Greenland Technologies Holding if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Greenland Technologies Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Greenland Technologies Holding 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. Over the last three years, Greenland Technologies Holding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Greenland Technologies Holding has US$13.0m in net cash and a strong balance sheet. So we don't have any problem with Greenland Technologies Holding's use of debt. 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. Case in point: We've spotted 3 warning signs for Greenland Technologies Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.