Here's Why Doctorglasses ChainLtd (SZSE:300622) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Doctorglasses Chain Co.,Ltd. (SZSE:300622) 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Doctorglasses ChainLtd

What Is Doctorglasses ChainLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Doctorglasses ChainLtd had debt of CN¥33.3m, up from none in one year. However, its balance sheet shows it holds CN¥191.5m in cash, so it actually has CN¥158.3m net cash.

How Strong Is Doctorglasses ChainLtd's Balance Sheet?

The latest balance sheet data shows that Doctorglasses ChainLtd had liabilities of CN¥390.2m due within a year, and liabilities of CN¥93.7m falling due after that. Offsetting these obligations, it had cash of CN¥191.5m as well as receivables valued at CN¥143.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥149.1m.

Of course, Doctorglasses ChainLtd has a market capitalization of CN¥6.84b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Doctorglasses ChainLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Doctorglasses ChainLtd saw its EBIT drop by 9.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Doctorglasses ChainLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Doctorglasses ChainLtd 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. Over the last three years, Doctorglasses ChainLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Doctorglasses ChainLtd has CN¥158.3m in net cash. The cherry on top was that in converted 174% of that EBIT to free cash flow, bringing in CN¥230m. So is Doctorglasses ChainLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Doctorglasses ChainLtd has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.