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

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.' 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 DR Corporation Limited (SZSE:301177) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 DR

How Much Debt Does DR Carry?

As you can see below, DR had CN¥240.6m of debt at September 2024, down from CN¥319.2m a year prior. But it also has CN¥5.13b in cash to offset that, meaning it has CN¥4.89b net cash.

How Healthy Is DR's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DR had liabilities of CN¥765.5m due within 12 months and liabilities of CN¥80.3m due beyond that. On the other hand, it had cash of CN¥5.13b and CN¥63.6m worth of receivables due within a year. So it actually has CN¥4.35b more liquid assets than total liabilities.

This excess liquidity is a great indication that DR's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, DR boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DR 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.

Over 12 months, DR made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 35%. To be frank that doesn't bode well.

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¥15m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 2 warning signs for DR you should be aware of.

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.