Is DBG Technology (SZSE:300735) Using Too Much Debt?

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.' 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. We note that DBG Technology Co., Ltd. (SZSE:300735) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for DBG Technology

What Is DBG Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 DBG Technology had debt of CN¥1.12b, up from CN¥385.3m in one year. But it also has CN¥3.60b in cash to offset that, meaning it has CN¥2.47b net cash.

How Healthy Is DBG Technology's Balance Sheet?

We can see from the most recent balance sheet that DBG Technology had liabilities of CN¥2.89b falling due within a year, and liabilities of CN¥107.5m due beyond that. Offsetting this, it had CN¥3.60b in cash and CN¥1.25b in receivables that were due within 12 months. So it can boast CN¥1.85b more liquid assets than total liabilities.

This short term liquidity is a sign that DBG Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that DBG Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that DBG Technology has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DBG 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 company can only pay off debt with cold hard cash, not accounting profits. DBG 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. In the last three years, DBG Technology's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case DBG Technology has CN¥2.47b in net cash and a decent-looking balance sheet. And we liked the look of last year's 79% year-on-year EBIT growth. So is DBG Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that DBG Technology is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.