Dare Power Dekor HomeLtd (SZSE:000910) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dare Power Dekor Home Co.,Ltd. (SZSE:000910) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dare Power Dekor HomeLtd

What Is Dare Power Dekor HomeLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Dare Power Dekor HomeLtd had debt of CN¥62.7m, up from CN¥48.0m in one year. But it also has CN¥2.92b in cash to offset that, meaning it has CN¥2.85b net cash.

How Healthy Is Dare Power Dekor HomeLtd's Balance Sheet?

The latest balance sheet data shows that Dare Power Dekor HomeLtd had liabilities of CN¥2.30b due within a year, and liabilities of CN¥145.5m falling due after that. On the other hand, it had cash of CN¥2.92b and CN¥1.70b worth of receivables due within a year. So it actually has CN¥2.17b more liquid assets than total liabilities.

This surplus liquidity suggests that Dare Power Dekor HomeLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Dare Power Dekor HomeLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Dare Power Dekor HomeLtd saw its EBIT decline by 2.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dare Power Dekor HomeLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dare Power Dekor HomeLtd 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. Happily for any shareholders, Dare Power Dekor HomeLtd 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 we empathize with investors who find debt concerning, you should keep in mind that Dare Power Dekor HomeLtd has net cash of CN¥2.85b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥434m, being 130% of its EBIT. So we don't think Dare Power Dekor HomeLtd'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 Dare Power Dekor HomeLtd .

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.