Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dongfeng Electronic Technology Co.,Ltd. (SHSE:600081) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Dongfeng Electronic TechnologyLtd
How Much Debt Does Dongfeng Electronic TechnologyLtd Carry?
As you can see below, Dongfeng Electronic TechnologyLtd had CN¥761.8m of debt at September 2023, down from CN¥838.3m a year prior. But on the other hand it also has CN¥3.69b in cash, leading to a CN¥2.93b net cash position.
A Look At Dongfeng Electronic TechnologyLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Dongfeng Electronic TechnologyLtd had liabilities of CN¥4.56b due within 12 months and liabilities of CN¥395.5m due beyond that. On the other hand, it had cash of CN¥3.69b and CN¥2.83b worth of receivables due within a year. So it actually has CN¥1.56b more liquid assets than total liabilities.
This excess liquidity suggests that Dongfeng Electronic TechnologyLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Dongfeng Electronic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Dongfeng Electronic TechnologyLtd's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dongfeng Electronic TechnologyLtd'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dongfeng Electronic TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Dongfeng Electronic TechnologyLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case Dongfeng Electronic TechnologyLtd has CN¥2.93b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥864m, being 138% of its EBIT. So is Dongfeng Electronic TechnologyLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 4 warning signs for Dongfeng Electronic TechnologyLtd that 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.