These 4 Measures Indicate That Doctorglasses ChainLtd (SZSE:300622) Is Using Debt Reasonably Well

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.' 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. Importantly, Doctorglasses Chain Co.,Ltd. (SZSE:300622) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Doctorglasses ChainLtd

How Much Debt Does Doctorglasses ChainLtd Carry?

As you can see below, at the end of September 2024, Doctorglasses ChainLtd had CN¥33.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥191.5m in cash, so it actually has CN¥158.3m net cash.

A Look At Doctorglasses ChainLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Doctorglasses ChainLtd had liabilities of CN¥390.2m due within 12 months and liabilities of CN¥93.7m due beyond 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.

Having regard to Doctorglasses ChainLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥8.63b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Doctorglasses ChainLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Doctorglasses ChainLtd saw its EBIT decline by 9.8% over the last year. 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 ultimately the future profitability of the business will decide if Doctorglasses ChainLtd 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. While Doctorglasses ChainLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Doctorglasses ChainLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Doctorglasses ChainLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥158.3m. The cherry on top was that in converted 174% of that EBIT to free cash flow, bringing in CN¥230m. So we don't think Doctorglasses ChainLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Doctorglasses ChainLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.