David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does DBG Technology Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 DBG Technology had CN¥1.12b of debt, an increase on CN¥385.3m, over one year. However, its balance sheet shows it holds CN¥3.60b in cash, so it actually has CN¥2.47b net cash.
How Healthy Is DBG Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that DBG Technology had liabilities of CN¥2.89b due within 12 months and liabilities of CN¥107.5m due beyond that. On the other hand, it had cash of CN¥3.60b and CN¥1.25b worth of receivables due within a year. So it actually has CN¥1.85b more liquid assets than total liabilities.
This short term liquidity is a sign that DBG Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DBG Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that DBG Technology has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DBG Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, DBG Technology recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that DBG Technology has net cash of CN¥2.47b, as well as more liquid assets than liabilities. And we liked the look of last year's 79% year-on-year EBIT growth. So is DBG Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with DBG Technology (at least 1 which is significant) , and understanding them should be part of your investment process.
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.