Would Guangdong DPLtd (SZSE:300808) Be Better Off With Less Debt?

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 Guangdong DP Co.,Ltd. (SZSE:300808) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Guangdong DPLtd

How Much Debt Does Guangdong DPLtd Carry?

The image below, which you can click on for greater detail, shows that Guangdong DPLtd had debt of CN¥129.9m at the end of September 2024, a reduction from CN¥191.2m over a year. However, it does have CN¥81.5m in cash offsetting this, leading to net debt of about CN¥48.4m.

A Look At Guangdong DPLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong DPLtd had liabilities of CN¥95.0m due within 12 months and liabilities of CN¥145.6m due beyond that. Offsetting these obligations, it had cash of CN¥81.5m as well as receivables valued at CN¥181.9m due within 12 months. So it actually has 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¥4.81b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Guangdong DPLtd has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangdong DPLtd 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.

In the last year Guangdong DPLtd had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥408m. 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. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. 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 3 warning signs with Guangdong DPLtd (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.