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.' 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. As with many other companies Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Dongguan Chitwing Technology's Net Debt?

As you can see below, at the end of September 2024, Dongguan Chitwing Technology had CN¥435.4m of debt, up from CN¥368.9m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥93.1m, its net debt is less, at about CN¥342.3m.

How Strong Is Dongguan Chitwing Technology's Balance Sheet?

According to the last reported balance sheet, Dongguan Chitwing Technology had liabilities of CN¥983.2m due within 12 months, and liabilities of CN¥277.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥93.1m as well as receivables valued at CN¥390.7m due within 12 months. So it has liabilities totalling CN¥776.8m more than its cash and near-term receivables, combined.

Given Dongguan Chitwing Technology has a market capitalization of CN¥4.67b, it's hard to believe these liabilities pose much threat. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Dongguan Chitwing Technology

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. That makes us nervous, to say the least.

Caveat Emptor

While Dongguan Chitwing Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥199m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥98m in negative free cash flow over the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Dongguan Chitwing Technology has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.