Does Guangdong DFP New Material Group (SHSE:601515) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Guangdong DFP New Material Group Co., Ltd. (SHSE:601515) makes use of debt. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangdong DFP New Material Group

What Is Guangdong DFP New Material Group's Debt?

As you can see below, at the end of March 2024, Guangdong DFP New Material Group had CN¥354.3m of debt, up from CN¥295.0m a year ago. Click the image for more detail. However, it does have CN¥2.18b in cash offsetting this, leading to net cash of CN¥1.83b.

A Look At Guangdong DFP New Material Group's Liabilities

The latest balance sheet data shows that Guangdong DFP New Material Group had liabilities of CN¥634.1m due within a year, and liabilities of CN¥633.0m falling due after that. Offsetting this, it had CN¥2.18b in cash and CN¥978.3m in receivables that were due within 12 months. So it can boast CN¥1.90b more liquid assets than total liabilities.

This surplus liquidity suggests that Guangdong DFP New Material Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Guangdong DFP New Material Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangdong DFP New Material 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 Guangdong DFP New Material Group had a loss before interest and tax, and actually shrunk its revenue by 43%, to CN¥2.1b. To be frank that doesn't bode well.

So How Risky Is Guangdong DFP New Material Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Guangdong DFP New Material Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥646m of cash and made a loss of CN¥62m. Given it only has net cash of CN¥1.83b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Guangdong DFP New Material Group , and understanding them should be part of your investment process.

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.