Is Dajin Heavy IndustryLtd (SZSE:002487) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Dajin Heavy Industry Co.,Ltd. (SZSE:002487) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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. 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 Dajin Heavy IndustryLtd

What Is Dajin Heavy IndustryLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Dajin Heavy IndustryLtd had CN¥74.4m of debt in March 2024, down from CN¥693.3m, one year before. But on the other hand it also has CN¥2.32b in cash, leading to a CN¥2.25b net cash position.

How Healthy Is Dajin Heavy IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Dajin Heavy IndustryLtd had liabilities of CN¥2.68b due within 12 months, and liabilities of CN¥378.1m due beyond 12 months. On the other hand, it had cash of CN¥2.32b and CN¥2.24b worth of receivables due within a year. So it actually has CN¥1.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Dajin Heavy IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Dajin Heavy IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Dajin Heavy IndustryLtd grew its EBIT at 11% over the last year, further increasing its ability to manage 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 Dajin Heavy IndustryLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dajin Heavy IndustryLtd 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, Dajin Heavy IndustryLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dajin Heavy IndustryLtd has net cash of CN¥2.25b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Dajin Heavy IndustryLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Dajin Heavy IndustryLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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