Does Guangdong Dtech Technology (SZSE:301377) 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. We can see that Guangdong Dtech Technology Co., Ltd. (SZSE:301377) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangdong Dtech Technology

What Is Guangdong Dtech Technology's Debt?

As you can see below, Guangdong Dtech Technology had CN¥160.4m of debt at September 2024, down from CN¥214.3m a year prior. But on the other hand it also has CN¥749.7m in cash, leading to a CN¥589.3m net cash position.

A Look At Guangdong Dtech Technology's Liabilities

We can see from the most recent balance sheet that Guangdong Dtech Technology had liabilities of CN¥745.3m falling due within a year, and liabilities of CN¥145.4m due beyond that. On the other hand, it had cash of CN¥749.7m and CN¥872.5m worth of receivables due within a year. So it can boast CN¥731.5m more liquid assets than total liabilities.

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

But the bad news is that Guangdong Dtech Technology has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangdong Dtech Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Guangdong Dtech Technology 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. Over the last three years, Guangdong Dtech Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Dtech Technology has net cash of CN¥589.3m, as well as more liquid assets than liabilities. So we don't have any problem with Guangdong Dtech Technology's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with Guangdong Dtech Technology .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.