Is DeHua TB New Decoration MaterialLtd (SZSE:002043) Using Too Much Debt?

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 can see that DeHua TB New Decoration Material Co.,Ltd (SZSE:002043) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for DeHua TB New Decoration MaterialLtd

How Much Debt Does DeHua TB New Decoration MaterialLtd Carry?

The image below, which you can click on for greater detail, shows that DeHua TB New Decoration MaterialLtd had debt of CN¥40.6m at the end of June 2024, a reduction from CN¥264.0m over a year. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥1.63b.

How Strong Is DeHua TB New Decoration MaterialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DeHua TB New Decoration MaterialLtd had liabilities of CN¥2.68b due within 12 months and liabilities of CN¥63.1m due beyond that. On the other hand, it had cash of CN¥1.67b and CN¥1.07b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to DeHua TB New Decoration MaterialLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥9.89b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, DeHua TB New Decoration MaterialLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, DeHua TB New Decoration MaterialLtd grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. 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 DeHua TB New Decoration MaterialLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DeHua TB New Decoration MaterialLtd 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. Happily for any shareholders, DeHua TB New Decoration MaterialLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DeHua TB New Decoration MaterialLtd has CN¥1.63b in net cash. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in CN¥1.4b. So is DeHua TB New Decoration MaterialLtd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for DeHua TB New Decoration MaterialLtd you should be aware of.

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.

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.