Is Guangdong DPLtd (SZSE:300808) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Guangdong DP Co.,Ltd. (SZSE:300808) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Guangdong DPLtd

What Is Guangdong DPLtd's Debt?

As you can see below, Guangdong DPLtd had CN¥129.9m of debt at September 2024, down from CN¥191.2m a year prior. However, it does have CN¥81.5m in cash offsetting this, leading to net debt of about CN¥48.4m.

How Strong Is Guangdong DPLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong DPLtd had liabilities of CN¥95.0m due within a year, and liabilities of CN¥145.6m falling due after that. Offsetting this, it had CN¥81.5m in cash and CN¥181.9m in receivables that were due within 12 months. So it can boast CN¥22.7m more liquid assets than total liabilities.

Having regard to Guangdong DPLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.06b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Guangdong DPLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong DPLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Guangdong DPLtd made a loss at the EBIT level, and saw its revenue drop to CN¥408m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Guangdong DPLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥18m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Guangdong DPLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.