We Think Dongrui Food Group (SZSE:001201) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. Importantly, Dongrui Food Group Co., Ltd. (SZSE:001201) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dongrui Food Group

What Is Dongrui Food Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Dongrui Food Group had debt of CN¥2.03b, up from CN¥1.41b in one year. However, it does have CN¥977.9m in cash offsetting this, leading to net debt of about CN¥1.05b.

How Strong Is Dongrui Food Group's Balance Sheet?

According to the last reported balance sheet, Dongrui Food Group had liabilities of CN¥1.40b due within 12 months, and liabilities of CN¥1.25b due beyond 12 months. Offsetting these obligations, it had cash of CN¥977.9m as well as receivables valued at CN¥27.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.65b.

Dongrui Food Group has a market capitalization of CN¥5.38b, 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. 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 Dongrui Food Group 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.

In the last year Dongrui Food Group had a loss before interest and tax, and actually shrunk its revenue by 25%, to CN¥992m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Dongrui Food Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥375m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥958m of cash over the last year. So in short it's a really risky stock. 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 1 warning sign for Dongrui Food Group 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.

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