Does Guangdong Dongfang Precision Science & Technology (SZSE:002611) Have A Healthy Balance Sheet?

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.' 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. We can see that Guangdong Dongfang Precision Science & Technology Co., Ltd. (SZSE:002611) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Guangdong Dongfang Precision Science & Technology

What Is Guangdong Dongfang Precision Science & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Dongfang Precision Science & Technology had CN¥298.0m of debt in September 2024, down from CN¥515.2m, one year before. But on the other hand it also has CN¥2.21b in cash, leading to a CN¥1.91b net cash position.

How Healthy Is Guangdong Dongfang Precision Science & Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Dongfang Precision Science & Technology had liabilities of CN¥1.88b due within 12 months and liabilities of CN¥394.4m due beyond that. Offsetting these obligations, it had cash of CN¥2.21b as well as receivables valued at CN¥986.1m due within 12 months. So it actually has CN¥915.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Dongfang Precision Science & Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangdong Dongfang Precision Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Guangdong Dongfang Precision Science & Technology grew its EBIT at 19% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Dongfang Precision Science & Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangdong Dongfang Precision Science & 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, Guangdong Dongfang Precision Science & Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Dongfang Precision Science & Technology has net cash of CN¥1.91b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So is Guangdong Dongfang Precision Science & Technology's debt a risk? It doesn't seem so to us. 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. For example - Guangdong Dongfang Precision Science & Technology has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.