Is Daheng New Epoch Technology (SHSE:600288) 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.' 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 Daheng New Epoch Technology Inc. (SHSE:600288) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Daheng New Epoch Technology

What Is Daheng New Epoch Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Daheng New Epoch Technology had CN¥218.7m of debt, an increase on CN¥206.7m, over one year. But it also has CN¥674.3m in cash to offset that, meaning it has CN¥455.6m net cash.

How Strong Is Daheng New Epoch Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daheng New Epoch Technology had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥28.4m due beyond that. On the other hand, it had cash of CN¥674.3m and CN¥891.1m worth of receivables due within a year. So it actually has CN¥321.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Daheng New Epoch Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Daheng New Epoch Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daheng New Epoch Technology 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.

In the last year Daheng New Epoch Technology had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.2b. We would much prefer see growth.

So How Risky Is Daheng New Epoch Technology?

While Daheng New Epoch Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥72m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Daheng New Epoch Technology is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.