Here's Why Zhejiang Dafeng Industry (SHSE:603081) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zhejiang Dafeng Industry Co., Ltd (SHSE:603081) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Zhejiang Dafeng Industry

What Is Zhejiang Dafeng Industry's Net Debt?

As you can see below, at the end of June 2024, Zhejiang Dafeng Industry had CN¥2.84b of debt, up from CN¥2.58b a year ago. Click the image for more detail. However, it also had CN¥1.08b in cash, and so its net debt is CN¥1.76b.

How Healthy Is Zhejiang Dafeng Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Dafeng Industry had liabilities of CN¥3.12b due within 12 months and liabilities of CN¥1.91b due beyond that. Offsetting these obligations, it had cash of CN¥1.08b as well as receivables valued at CN¥2.21b due within 12 months. So it has liabilities totalling CN¥1.75b more than its cash and near-term receivables, combined.

Zhejiang Dafeng Industry has a market capitalization of CN¥4.20b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Dafeng Industry'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.

In the last year Zhejiang Dafeng Industry had a loss before interest and tax, and actually shrunk its revenue by 49%, to CN¥1.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zhejiang Dafeng Industry's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥122m at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥212m and the profit of CN¥27m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Zhejiang Dafeng Industry has 3 warning signs (and 1 which is potentially serious) 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.