Is Daan Gene (SZSE:002030) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Daan Gene Co., Ltd. (SZSE:002030) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Daan Gene

How Much Debt Does Daan Gene Carry?

As you can see below, at the end of March 2024, Daan Gene had CN¥326.6m of debt, up from CN¥84.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥826.3m in cash, so it actually has CN¥499.7m net cash.

How Healthy Is Daan Gene's Balance Sheet?

We can see from the most recent balance sheet that Daan Gene had liabilities of CN¥1.47b falling due within a year, and liabilities of CN¥108.1m due beyond that. Offsetting these obligations, it had cash of CN¥826.3m as well as receivables valued at CN¥2.01b due within 12 months. So it can boast CN¥1.25b 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is Daan Gene'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 Daan Gene had a loss before interest and tax, and actually shrunk its revenue by 88%, to CN¥1.0b. 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¥587m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Daan Gene's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.