Is Dawei Technology (Guangdong) Group (SHSE:600589) Using Too Much Debt?

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 Dawei Technology (Guangdong) Group Co., Ltd. (SHSE:600589) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dawei Technology (Guangdong) Group

How Much Debt Does Dawei Technology (Guangdong) Group Carry?

As you can see below, Dawei Technology (Guangdong) Group had CN¥504.4m of debt at September 2024, down from CN¥1.37b a year prior. On the flip side, it has CN¥348.7m in cash leading to net debt of about CN¥155.7m.

How Healthy Is Dawei Technology (Guangdong) Group's Balance Sheet?

We can see from the most recent balance sheet that Dawei Technology (Guangdong) Group had liabilities of CN¥595.6m falling due within a year, and liabilities of CN¥581.9m due beyond that. On the other hand, it had cash of CN¥348.7m and CN¥78.4m worth of receivables due within a year. So it has liabilities totalling CN¥750.3m more than its cash and near-term receivables, combined.

Of course, Dawei Technology (Guangdong) Group has a market capitalization of CN¥7.79b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dawei Technology (Guangdong) Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Dawei Technology (Guangdong) Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Dawei Technology (Guangdong) Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥98m 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. Surprisingly, we note that it actually reported positive free cash flow of CN¥99m and a profit of CN¥176m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Dawei Technology (Guangdong) Group (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.