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.' 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. As with many other companies Daheng New Epoch Technology Inc. (SHSE:600288) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Daheng New Epoch Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Daheng New Epoch Technology had debt of CN¥127.4m at the end of September 2024, a reduction from CN¥218.7m over a year. But on the other hand it also has CN¥759.1m in cash, leading to a CN¥631.7m net cash position.

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

We can see from the most recent balance sheet that Daheng New Epoch Technology had liabilities of CN¥836.4m falling due within a year, and liabilities of CN¥14.5m due beyond that. Offsetting these obligations, it had cash of CN¥759.1m as well as receivables valued at CN¥775.2m due within 12 months. So it actually has CN¥683.4m more liquid assets than total liabilities.

It's good to see that Daheng New Epoch Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Daheng New Epoch Technology 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 you can't view debt in total isolation; since Daheng New Epoch Technology will need earnings to service that debt. 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.

View our latest analysis for Daheng New Epoch Technology

Over 12 months, Daheng New Epoch Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Daheng New Epoch Technology?

Although Daheng New Epoch Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥54m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 1 warning sign for Daheng New Epoch Technology you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.