These 4 Measures Indicate That Dajin Heavy IndustryLtd (SZSE:002487) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Dajin Heavy Industry Co.,Ltd. (SZSE:002487) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dajin Heavy IndustryLtd

What Is Dajin Heavy IndustryLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dajin Heavy IndustryLtd had CN¥506.9m of debt in September 2023, down from CN¥886.0m, one year before. However, its balance sheet shows it holds CN¥2.67b in cash, so it actually has CN¥2.16b net cash.

How Strong Is Dajin Heavy IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Dajin Heavy IndustryLtd had liabilities of CN¥2.83b due within a year, and liabilities of CN¥310.3m falling due after that. Offsetting this, it had CN¥2.67b in cash and CN¥2.40b in receivables that were due within 12 months. So it actually has CN¥1.93b 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.

The good news is that Dajin Heavy IndustryLtd has increased its EBIT by 5.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dajin Heavy IndustryLtd 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, a company can only pay off debt with cold hard cash, not accounting profits. Dajin Heavy IndustryLtd 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. 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¥2.16b, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.1% over the last year. So we don't have any problem with Dajin Heavy IndustryLtd's use of debt. 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. We've identified 1 warning sign with Dajin Heavy IndustryLtd , and understanding them should be part of your investment process.

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.