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.' 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. As with many other companies Zhe Jiang Dali Technology Co.,Ltd (SZSE:002214) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Zhe Jiang Dali TechnologyLtd
What Is Zhe Jiang Dali TechnologyLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhe Jiang Dali TechnologyLtd had CN¥191.7m of debt, an increase on CN¥114.5m, over one year. However, its balance sheet shows it holds CN¥282.8m in cash, so it actually has CN¥91.1m net cash.
A Look At Zhe Jiang Dali TechnologyLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Zhe Jiang Dali TechnologyLtd had liabilities of CN¥329.6m due within 12 months and liabilities of CN¥139.9m due beyond that. Offsetting this, it had CN¥282.8m in cash and CN¥860.5m in receivables that were due within 12 months. So it actually has CN¥673.8m more liquid assets than total liabilities.
This surplus suggests that Zhe Jiang Dali TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhe Jiang Dali TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhe Jiang Dali 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.
In the last year Zhe Jiang Dali TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥247m. That makes us nervous, to say the least.
So How Risky Is Zhe Jiang Dali TechnologyLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Zhe Jiang Dali TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥315m of cash and made a loss of CN¥278m. Given it only has net cash of CN¥91.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 1 warning sign for Zhe Jiang Dali TechnologyLtd that you should be aware of.
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.