Is Guangdong Dtech Technology (SZSE:301377) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guangdong Dtech Technology Co., Ltd. (SZSE:301377) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Guangdong Dtech Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Dtech Technology had CN¥267.2m of debt, an increase on CN¥177.8m, over one year. However, it does have CN¥713.6m in cash offsetting this, leading to net cash of CN¥446.3m.

How Healthy Is Guangdong Dtech Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Dtech Technology had liabilities of CN¥672.0m due within 12 months and liabilities of CN¥181.3m due beyond that. Offsetting this, it had CN¥713.6m in cash and CN¥803.0m in receivables that were due within 12 months. So it actually has CN¥663.3m more liquid assets than total liabilities.

This surplus suggests that Guangdong Dtech Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Dtech Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Guangdong Dtech Technology's load is not too heavy, because its EBIT was down 32% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangdong Dtech Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangdong Dtech Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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¥446.3m, as well as more liquid assets than liabilities. So while Guangdong Dtech Technology does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangdong Dtech Technology you should know about.

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.

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