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.' 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 Digital China Information Service Group Company Ltd. (SZSE:000555) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Digital China Information Service Group's Debt?
As you can see below, at the end of September 2023, Digital China Information Service Group had CN¥281.0m of debt, up from CN¥177.4m a year ago. Click the image for more detail. But it also has CN¥1.25b in cash to offset that, meaning it has CN¥969.4m net cash.
How Healthy Is Digital China Information Service Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Digital China Information Service Group had liabilities of CN¥5.43b due within 12 months and liabilities of CN¥123.1m due beyond that. On the other hand, it had cash of CN¥1.25b and CN¥4.75b worth of receivables due within a year. So it actually has CN¥448.9m more liquid assets than total liabilities.
This surplus suggests that Digital China Information Service Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Digital China Information Service Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Digital China Information Service Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Digital China Information Service Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Digital China Information Service Group?
While Digital China Information Service Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥173m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Digital China Information Service Group you should know about.
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.