Dongfang Electronics (SZSE:000682) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Dongfang Electronics Co., Ltd. (SZSE:000682) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Dongfang Electronics

What Is Dongfang Electronics's Debt?

The image below, which you can click on for greater detail, shows that Dongfang Electronics had debt of CN¥197.3m at the end of March 2024, a reduction from CN¥267.0m over a year. However, it does have CN¥3.11b in cash offsetting this, leading to net cash of CN¥2.91b.

How Healthy Is Dongfang Electronics' Balance Sheet?

We can see from the most recent balance sheet that Dongfang Electronics had liabilities of CN¥5.79b falling due within a year, and liabilities of CN¥192.5m due beyond that. Offsetting this, it had CN¥3.11b in cash and CN¥1.76b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.12b more than its cash and near-term receivables, combined.

Since publicly traded Dongfang Electronics shares are worth a total of CN¥14.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Dongfang Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Dongfang Electronics grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dongfang Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Dongfang Electronics 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. Happily for any shareholders, Dongfang Electronics actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dongfang Electronics has CN¥2.91b in net cash. And it impressed us with free cash flow of CN¥1.1b, being 112% of its EBIT. So we don't think Dongfang Electronics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Dongfang Electronics .

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.

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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.

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