Would Zhejiang Dafeng Industry (SHSE:603081) Be Better Off With Less 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 Zhejiang Dafeng Industry Co., Ltd (SHSE:603081) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Dafeng Industry

What Is Zhejiang Dafeng Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Dafeng Industry had CN¥2.80b of debt, an increase on CN¥2.59b, over one year. On the flip side, it has CN¥894.0m in cash leading to net debt of about CN¥1.91b.

How Healthy Is Zhejiang Dafeng Industry's Balance Sheet?

The latest balance sheet data shows that Zhejiang Dafeng Industry had liabilities of CN¥3.14b due within a year, and liabilities of CN¥1.78b falling due after that. On the other hand, it had cash of CN¥894.0m and CN¥2.28b worth of receivables due within a year. 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¥4.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Zhejiang Dafeng Industry had a loss before interest and tax, and actually shrunk its revenue by 49%, to CN¥1.4b. That makes us nervous, to say the least.

Caveat Emptor

While Zhejiang Dafeng Industry's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥102m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of CN¥57m and a profit of CN¥29m. 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. However, not all investment risk resides within the balance sheet - far from it. For example Zhejiang Dafeng Industry has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.