Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that DBG Technology Co., Ltd. (SZSE:300735) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for DBG Technology
What Is DBG Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 DBG Technology had CN¥207.7m of debt, an increase on CN¥183.7m, over one year. But on the other hand it also has CN¥2.40b in cash, leading to a CN¥2.20b net cash position.
How Strong Is DBG Technology's Balance Sheet?
We can see from the most recent balance sheet that DBG Technology had liabilities of CN¥1.72b falling due within a year, and liabilities of CN¥111.5m due beyond that. On the other hand, it had cash of CN¥2.40b and CN¥1.39b worth of receivables due within a year. So it actually has CN¥1.97b more liquid assets than total liabilities.
This surplus suggests that DBG Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, DBG Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for DBG Technology if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DBG Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While DBG Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, DBG Technology created free cash flow amounting to 6.7% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case DBG Technology has CN¥2.20b in net cash and a decent-looking balance sheet. So we are not troubled with DBG Technology's debt use. 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. Be aware that DBG Technology is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.