We Think Gorilla Technology Group (NASDAQ:GRRR) Can Stay On Top Of Its Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Gorilla Technology Group Inc. ( NASDAQ:GRRR ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gorilla Technology Group

How Much Debt Does Gorilla Technology Group Carry?

As you can see below, at the end of June 2024, Gorilla Technology Group had US$20.5m of debt, down from US$24.5m a year ago. Click the image for more detail. However, because it has a cash reserve of US$11.2m and the current portion of its time deposits is $20.9m, the company is free of debt when netting off cash and cash equivalents.

A Look At Gorilla Technology Group's Liabilities

We can see from the most recent balance sheet that Gorilla Technology Group had liabilities of US$54.9m falling due within a year, and liabilities of US$6.12m due beyond that. On the other hand, it had cash of US$11.2m, $20.9m in Time deposits and US$52.8m worth of receivables due within a year. So it can boast US$25.41m more liquid assets than total liabilities.

This surplus suggests that Gorilla Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Seeing as Gorilla Technology Group's cash equivalents cover their current debt, their net debt to EBITDA ratio is in fact negative at -0.36. And its EBIT covers its interest expense a whopping 326 times over. So we're pretty relaxed about its super-conservative use of debt. Although Gorilla Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated US$31m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gorilla Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Gorilla Technology Group 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.

Our View

Gorilla Technology Group's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to cover its interest expense with its EBIT is pretty flash. Considering this range of data points, we think Gorilla Technology Group is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Gorilla Technology Group (of which 3 make us uncomfortable!) you should know about.

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.