Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Dongguan Mentech Optical & Magnetic Co., Ltd. (SZSE:002902) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Dongguan Mentech Optical & Magnetic's Net Debt?

As you can see below, at the end of March 2024, Dongguan Mentech Optical & Magnetic had CN¥560.6m of debt, up from CN¥258.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥638.9m in cash, leading to a CN¥78.4m net cash position.

How Strong Is Dongguan Mentech Optical & Magnetic's Balance Sheet?

The latest balance sheet data shows that Dongguan Mentech Optical & Magnetic had liabilities of CN¥1.42b due within a year, and liabilities of CN¥218.7m falling due after that. On the other hand, it had cash of CN¥638.9m and CN¥651.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥348.3m.

Since publicly traded Dongguan Mentech Optical & Magnetic shares are worth a total of CN¥5.43b, 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. Despite its noteworthy liabilities, Dongguan Mentech Optical & Magnetic boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dongguan Mentech Optical & Magnetic'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.

Over 12 months, Dongguan Mentech Optical & Magnetic made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Dongguan Mentech Optical & Magnetic?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dongguan Mentech Optical & Magnetic had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥202m of cash and made a loss of CN¥288m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥78.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 2 warning signs we've spotted with Dongguan Mentech Optical & Magnetic (including 1 which is a bit concerning) .

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.