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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Dajin Heavy Industry Co.,Ltd. (SZSE:002487) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dajin Heavy IndustryLtd

How Much Debt Does Dajin Heavy IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Dajin Heavy IndustryLtd had debt of CN¥32.3m at the end of September 2024, a reduction from CN¥506.9m over a year. However, its balance sheet shows it holds CN¥2.52b in cash, so it actually has CN¥2.49b net cash.

A Look At Dajin Heavy IndustryLtd's Liabilities

We can see from the most recent balance sheet that Dajin Heavy IndustryLtd had liabilities of CN¥3.89b falling due within a year, and liabilities of CN¥591.1m due beyond that. On the other hand, it had cash of CN¥2.52b and CN¥2.21b worth of receivables due within a year. So it can boast CN¥244.6m more liquid assets than total liabilities.

Having regard to Dajin Heavy IndustryLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥14.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

It is just as well that Dajin Heavy IndustryLtd's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dajin Heavy IndustryLtd can strengthen its balance sheet over time. 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 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. In the last three years, Dajin Heavy IndustryLtd created free cash flow amounting to 6.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dajin Heavy IndustryLtd has CN¥2.49b in net cash and a decent-looking balance sheet. So we are not troubled with Dajin Heavy IndustryLtd's debt use. 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. We've identified 1 warning sign with Dajin Heavy IndustryLtd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.