These 4 Measures Indicate That Dongfang Electronics (SZSE:000682) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Dongfang Electronics Co., Ltd. (SZSE:000682) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dongfang Electronics

What Is Dongfang Electronics's Debt?

The chart below, which you can click on for greater detail, shows that Dongfang Electronics had CN¥261.2m in debt in June 2024; about the same as the year before. But it also has CN¥3.14b in cash to offset that, meaning it has CN¥2.88b net cash.

How Healthy Is Dongfang Electronics' Balance Sheet?

The latest balance sheet data shows that Dongfang Electronics had liabilities of CN¥6.02b due within a year, and liabilities of CN¥190.7m falling due after that. Offsetting this, it had CN¥3.14b in cash and CN¥1.82b in receivables that were due within 12 months. So its liabilities total CN¥1.25b more than the combination of its cash and short-term receivables.

Of course, Dongfang Electronics has a market capitalization of CN¥14.8b, so these liabilities are probably manageable. 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.

In addition to that, we're happy to report that Dongfang Electronics has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Dongfang Electronics's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.88b. And it impressed us with free cash flow of CN¥1.0b, being 132% of its EBIT. So is Dongfang Electronics'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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dongfang Electronics you should know about.

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.