Is Guangdong DFP New Material Group (SHSE:601515) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Guangdong DFP New Material Group Co., Ltd. (SHSE:601515) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong DFP New Material Group

What Is Guangdong DFP New Material Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangdong DFP New Material Group had CN¥475.2m of debt, an increase on CN¥334.8m, over one year. However, it does have CN¥1.93b in cash offsetting this, leading to net cash of CN¥1.45b.

How Healthy Is Guangdong DFP New Material Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong DFP New Material Group had liabilities of CN¥540.5m due within 12 months and liabilities of CN¥717.4m due beyond that. Offsetting this, it had CN¥1.93b in cash and CN¥695.5m in receivables that were due within 12 months. So it actually has CN¥1.36b more liquid assets than total liabilities.

It's good to see that Guangdong DFP New Material Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Guangdong DFP New Material Group had a loss before interest and tax, and actually shrunk its revenue by 49%, to CN¥1.6b. That makes us nervous, to say the least.

So How Risky Is Guangdong DFP New Material Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Guangdong DFP New Material Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥455m and booked a CN¥277m accounting loss. Given it only has net cash of CN¥1.45b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Guangdong DFP New Material Group that you should be aware of.

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.

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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.