We Think Dongfang Electronics (SZSE:000682) Can Manage Its Debt With Ease

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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

View 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 at September 2024 Dongfang Electronics had debt of CN¥335.5m, up from CN¥308.0m in one year. However, it does have CN¥3.42b in cash offsetting this, leading to net cash of CN¥3.09b.

How Healthy Is Dongfang Electronics' Balance Sheet?

The latest balance sheet data shows that Dongfang Electronics had liabilities of CN¥6.63b due within a year, and liabilities of CN¥193.2m falling due after that. Offsetting these obligations, it had cash of CN¥3.42b as well as receivables valued at CN¥2.04b due within 12 months. So it has liabilities totalling CN¥1.35b more than its cash and near-term receivables, combined.

Given Dongfang Electronics has a market capitalization of CN¥13.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 36%, thus reducing the spectre of future debt repayments. 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'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. 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 Dongfang Electronics does have more liabilities than liquid assets, it also has net cash of CN¥3.09b. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in CN¥1.1b. So is Dongfang Electronics's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Dongfang Electronics has 1 warning sign we think you should be aware of.

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.