Dianguang Explosion-proof TechnologyLtd (SZSE:002730) Seems To Use Debt Quite Sensibly

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. We note that Dianguang Explosion-proof Technology Co.,Ltd. (SZSE:002730) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dianguang Explosion-proof TechnologyLtd

What Is Dianguang Explosion-proof TechnologyLtd's Net Debt?

As you can see below, at the end of September 2024, Dianguang Explosion-proof TechnologyLtd had CN¥311.5m of debt, up from CN¥263.7m a year ago. Click the image for more detail. However, it does have CN¥397.5m in cash offsetting this, leading to net cash of CN¥86.0m.

How Strong Is Dianguang Explosion-proof TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Dianguang Explosion-proof TechnologyLtd had liabilities of CN¥847.3m due within a year, and liabilities of CN¥120.0m falling due after that. On the other hand, it had cash of CN¥397.5m and CN¥852.9m worth of receivables due within a year. So it can boast CN¥283.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Dianguang Explosion-proof TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Dianguang Explosion-proof TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Dianguang Explosion-proof TechnologyLtd saw its EBIT drop by 9.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dianguang Explosion-proof TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Dianguang Explosion-proof TechnologyLtd 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, Dianguang Explosion-proof TechnologyLtd 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 Dianguang Explosion-proof TechnologyLtd has net cash of CN¥86.0m, as well as more liquid assets than liabilities. So we don't have any problem with Dianguang Explosion-proof TechnologyLtd's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Dianguang Explosion-proof TechnologyLtd (including 2 which are potentially serious) .

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.