Is Guangdong Dongfang Precision Science & Technology (SZSE:002611) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies Guangdong Dongfang Precision Science & Technology Co., Ltd. (SZSE:002611) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guangdong Dongfang Precision Science & Technology

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

As you can see below, Guangdong Dongfang Precision Science & Technology had CN¥272.0m of debt at June 2024, down from CN¥491.0m a year prior. But it also has CN¥2.16b in cash to offset that, meaning it has CN¥1.89b net cash.

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

The latest balance sheet data shows that Guangdong Dongfang Precision Science & Technology had liabilities of CN¥2.05b due within a year, and liabilities of CN¥393.0m falling due after that. Offsetting this, it had CN¥2.16b in cash and CN¥1.07b in receivables that were due within 12 months. So it can boast CN¥786.6m more liquid assets than total liabilities.

This surplus suggests that Guangdong Dongfang Precision Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In addition to that, we're happy to report that Guangdong Dongfang Precision Science & Technology has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangdong Dongfang Precision Science & Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Looking at the most recent three years, Guangdong Dongfang Precision Science & Technology recorded free cash flow of 35% 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 Guangdong Dongfang Precision Science & Technology has net cash of CN¥1.89b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Guangdong Dongfang Precision Science & Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guangdong Dongfang Precision Science & Technology's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.