We Think Dongguan Dingtong Precision Metal (SHSE:688668) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Dongguan Dingtong Precision Metal Co., Ltd. (SHSE:688668) does use debt in its business. But the more important question is: how much risk is that debt creating?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Dongguan Dingtong Precision Metal's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Dongguan Dingtong Precision Metal had CN¥14.0m of debt, an increase on none, over one year. But it also has CN¥129.3m in cash to offset that, meaning it has CN¥115.4m net cash.

A Look At Dongguan Dingtong Precision Metal's Liabilities

Zooming in on the latest balance sheet data, we can see that Dongguan Dingtong Precision Metal had liabilities of CN¥207.6m due within 12 months and liabilities of CN¥93.5m due beyond that. Offsetting this, it had CN¥129.3m in cash and CN¥422.7m in receivables that were due within 12 months. So it actually has CN¥250.9m more liquid assets than total liabilities.

This surplus suggests that Dongguan Dingtong Precision Metal has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dongguan Dingtong Precision Metal has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Dongguan Dingtong Precision Metal

Better yet, Dongguan Dingtong Precision Metal grew its EBIT by 268% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Dongguan Dingtong Precision Metal can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dongguan Dingtong Precision Metal 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, Dongguan Dingtong Precision Metal burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dongguan Dingtong Precision Metal has CN¥115.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 268% over the last year. So we are not troubled with Dongguan Dingtong Precision Metal's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Dongguan Dingtong Precision Metal (including 1 which is significant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.