Is Daan Gene (SZSE:002030) Using Debt In A Risky Way?

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.' 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 Daan Gene Co., Ltd. (SZSE:002030) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Daan Gene

What Is Daan Gene's Debt?

As you can see below, Daan Gene had CN¥146.3m of debt at September 2024, down from CN¥294.7m a year prior. But on the other hand it also has CN¥934.5m in cash, leading to a CN¥788.3m net cash position.

A Look At Daan Gene's Liabilities

The latest balance sheet data shows that Daan Gene had liabilities of CN¥1.23b due within a year, and liabilities of CN¥152.1m falling due after that. Offsetting this, it had CN¥934.5m in cash and CN¥1.55b in receivables that were due within 12 months. So it can boast CN¥1.10b more liquid assets than total liabilities.

This surplus suggests that Daan Gene has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Daan Gene 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 you can't view debt in total isolation; since Daan Gene 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.

Over 12 months, Daan Gene made a loss at the EBIT level, and saw its revenue drop to CN¥930m, which is a fall of 74%. To be frank that doesn't bode well.

So How Risky Is Daan Gene?

Although Daan Gene had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥270m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Daan Gene , 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.