Does Dongguan Eontec (SZSE:300328) Have A Healthy Balance Sheet?

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.' 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. Importantly, Dongguan Eontec Co., Ltd. (SZSE:300328) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dongguan Eontec

What Is Dongguan Eontec's Debt?

As you can see below, Dongguan Eontec had CN¥688.6m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥217.7m in cash, and so its net debt is CN¥470.9m.

A Look At Dongguan Eontec's Liabilities

According to the last reported balance sheet, Dongguan Eontec had liabilities of CN¥1.02b due within 12 months, and liabilities of CN¥392.5m due beyond 12 months. Offsetting this, it had CN¥217.7m in cash and CN¥526.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥670.1m.

Since publicly traded Dongguan Eontec shares are worth a total of CN¥5.68b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dongguan Eontec'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.

In the last year Dongguan Eontec had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to CN¥1.7b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Dongguan Eontec produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥82m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥304m and the profit of CN¥717k. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Dongguan Eontec is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.