Dirui IndustrialLtd (SZSE:300396) Has A Rock Solid Balance Sheet

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.' 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 can see that Dirui Industrial Co.,Ltd. (SZSE:300396) does use debt in its business. 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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dirui IndustrialLtd

What Is Dirui IndustrialLtd's Debt?

As you can see below, at the end of September 2023, Dirui IndustrialLtd had CN¥342.8m of debt, up from CN¥293.0m a year ago. Click the image for more detail. But it also has CN¥849.0m in cash to offset that, meaning it has CN¥506.2m net cash.

A Look At Dirui IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Dirui IndustrialLtd had liabilities of CN¥926.3m due within 12 months and liabilities of CN¥100.1m due beyond that. Offsetting this, it had CN¥849.0m in cash and CN¥332.0m in receivables that were due within 12 months. So it can boast CN¥154.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Dirui IndustrialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Dirui IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Dirui IndustrialLtd grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. 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 Dirui IndustrialLtd 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. Dirui IndustrialLtd 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. Looking at the most recent three years, Dirui IndustrialLtd recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dirui IndustrialLtd has net cash of CN¥506.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Dirui IndustrialLtd's use of debt is risky. 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. We've identified 1 warning sign with Dirui IndustrialLtd , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.