Is Dalian Demaishi Precision Technology (SZSE:301007) A Risky Investment?

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.' 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 Dalian Demaishi Precision Technology Co., Ltd. (SZSE:301007) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dalian Demaishi Precision Technology

What Is Dalian Demaishi Precision Technology's Net Debt?

As you can see below, at the end of September 2024, Dalian Demaishi Precision Technology had CN¥100.2m of debt, up from CN¥95.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥118.3m in cash, leading to a CN¥18.0m net cash position.

How Strong Is Dalian Demaishi Precision Technology's Balance Sheet?

We can see from the most recent balance sheet that Dalian Demaishi Precision Technology had liabilities of CN¥334.0m falling due within a year, and liabilities of CN¥32.2m due beyond that. On the other hand, it had cash of CN¥118.3m and CN¥215.1m worth of receivables due within a year. So its liabilities total CN¥32.8m more than the combination of its cash and short-term receivables.

Having regard to Dalian Demaishi Precision Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Dalian Demaishi Precision Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Dalian Demaishi Precision Technology grew its EBIT by 6.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dalian Demaishi Precision 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dalian Demaishi Precision 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. During the last three years, Dalian Demaishi Precision Technology produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Dalian Demaishi Precision Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥18.0m. And it impressed us with free cash flow of CN¥46m, being 75% of its EBIT. So is Dalian Demaishi Precision 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Dalian Demaishi Precision Technology you should be aware of.

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.