Does Dongguan Chitwing Technology (SZSE:002855) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dongguan Chitwing Technology

What Is Dongguan Chitwing Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Dongguan Chitwing Technology had debt of CN¥435.4m, up from CN¥368.9m in one year. However, it does have CN¥93.1m in cash offsetting this, leading to net debt of about CN¥342.3m.

A Look At Dongguan Chitwing Technology's Liabilities

The latest balance sheet data shows that Dongguan Chitwing Technology had liabilities of CN¥983.2m due within a year, and liabilities of CN¥277.4m falling due after that. On the other hand, it had cash of CN¥93.1m and CN¥390.7m worth of receivables due within a year. So it has liabilities totalling CN¥776.8m more than its cash and near-term receivables, combined.

Of course, Dongguan Chitwing Technology has a market capitalization of CN¥5.88b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongguan Chitwing Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Dongguan Chitwing Technology had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥1.4b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Dongguan Chitwing Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥199m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥98m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Dongguan Chitwing Technology you should know about.

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.