Here's Why Dlg Exhibitions & Events (SHSE:600826) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Dlg Exhibitions & Events Corporation Limited (SHSE:600826) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

Check out our latest analysis for Dlg Exhibitions & Events

How Much Debt Does Dlg Exhibitions & Events Carry?

As you can see below, Dlg Exhibitions & Events had CN¥285.7m of debt at September 2024, down from CN¥497.2m a year prior. However, its balance sheet shows it holds CN¥2.29b in cash, so it actually has CN¥2.00b net cash.

How Strong Is Dlg Exhibitions & Events' Balance Sheet?

The latest balance sheet data shows that Dlg Exhibitions & Events had liabilities of CN¥960.9m due within a year, and liabilities of CN¥606.4m falling due after that. On the other hand, it had cash of CN¥2.29b and CN¥170.2m worth of receivables due within a year. So it can boast CN¥888.7m more liquid assets than total liabilities.

This surplus suggests that Dlg Exhibitions & Events has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dlg Exhibitions & Events boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Dlg Exhibitions & Events's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dlg Exhibitions & Events can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dlg Exhibitions & Events may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Dlg Exhibitions & Events recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dlg Exhibitions & Events has net cash of CN¥2.00b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥189m, being 93% of its EBIT. So we are not troubled with Dlg Exhibitions & Events's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Dlg Exhibitions & Events is showing 1 warning sign in our investment analysis , you should know about...

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.