Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Dalian My Gym Education Technology Co.,Ltd. (SZSE:002621) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Dalian My Gym Education TechnologyLtd
What Is Dalian My Gym Education TechnologyLtd's Debt?
The chart below, which you can click on for greater detail, shows that Dalian My Gym Education TechnologyLtd had CN¥309.1m in debt in September 2022; about the same as the year before. But on the other hand it also has CN¥960.5m in cash, leading to a CN¥651.4m net cash position.SZSE:002621 Debt to Equity History December 15th 2022
A Look At Dalian My Gym Education TechnologyLtd's Liabilities
According to the last reported balance sheet, Dalian My Gym Education TechnologyLtd had liabilities of CN¥943.5m due within 12 months, and liabilities of CN¥416.1m due beyond 12 months. Offsetting this, it had CN¥960.5m in cash and CN¥236.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥162.2m more than its cash and near-term receivables, combined.
Given Dalian My Gym Education TechnologyLtd has a market capitalization of CN¥3.91b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Dalian My Gym Education TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Dalian My Gym Education TechnologyLtd'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.
Over 12 months, Dalian My Gym Education TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥202m, which is a fall of 42%. To be frank that doesn't bode well.
So How Risky Is Dalian My Gym Education TechnologyLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dalian My Gym Education TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥19m of cash and made a loss of CN¥316m. With only CN¥651.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Dalian My Gym Education TechnologyLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.