Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) does use debt in its business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Dongguan Chitwing Technology
How Much Debt Does Dongguan Chitwing Technology Carry?
As you can see below, at the end of September 2023, Dongguan Chitwing Technology had CN¥368.9m of debt, up from CN¥110.0m a year ago. Click the image for more detail. However, it also had CN¥181.6m in cash, and so its net debt is CN¥187.4m.
How Strong Is Dongguan Chitwing Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Dongguan Chitwing Technology had liabilities of CN¥973.1m due within 12 months and liabilities of CN¥357.1m due beyond that. Offsetting these obligations, it had cash of CN¥181.6m as well as receivables valued at CN¥536.2m due within 12 months. So it has liabilities totalling CN¥612.4m more than its cash and near-term receivables, combined.
Since publicly traded Dongguan Chitwing Technology shares are worth a total of CN¥8.11b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongguan Chitwing Technology will need earnings to service that debt. 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.
In the last year Dongguan Chitwing Technology had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥2.0b. That makes us nervous, to say the least.
Caveat Emptor
Not only did Dongguan Chitwing Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥168m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥138m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Dongguan Chitwing Technology .
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.