Is Dongguan Eontec (SZSE:300328) 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.' 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 should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. 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.

How Much Debt Does Dongguan Eontec Carry?

The chart below, which you can click on for greater detail, shows that Dongguan Eontec had CN¥688.6m in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥217.7m, its net debt is less, at about CN¥470.9m.

How Strong Is Dongguan Eontec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dongguan Eontec had liabilities of CN¥1.02b due within 12 months and liabilities of CN¥392.5m due beyond that. On the other hand, it had cash of CN¥217.7m and CN¥526.7m worth of receivables due within a year. So its liabilities total CN¥670.1m more than the combination of its cash and short-term receivables.

Since publicly traded Dongguan Eontec shares are worth a total of CN¥7.85b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dongguan Eontec will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Dongguan Eontec

Over 12 months, Dongguan Eontec made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 2.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Dongguan Eontec had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥82m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of CN¥304m and a profit of CN¥717k. So one might argue that there's still a chance it can get things on the right track. 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 4 warning signs with Dongguan Eontec (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.