Is DR (SZSE:301177) Weighed On By Its Debt Load?

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.' 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 can see that DR Corporation Limited (SZSE:301177) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

See our latest analysis for DR

What Is DR's Debt?

The image below, which you can click on for greater detail, shows that DR had debt of CN¥140.3m at the end of June 2024, a reduction from CN¥278.1m over a year. But it also has CN¥5.22b in cash to offset that, meaning it has CN¥5.08b net cash.

A Look At DR's Liabilities

According to the last reported balance sheet, DR had liabilities of CN¥662.7m due within 12 months, and liabilities of CN¥95.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.22b as well as receivables valued at CN¥89.8m due within 12 months. So it actually has CN¥4.55b more liquid assets than total liabilities.

This surplus strongly suggests that DR has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that DR has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if DR can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, DR made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 40%. That makes us nervous, to say the least.

So How Risky Is DR?

Although DR had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥48m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 DR has 3 warning signs (and 1 which is potentially serious) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.