Does Dawei Technology (Guangdong) Group (SHSE:600589) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Dawei Technology (Guangdong) Group Co., Ltd. (SHSE:600589) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dawei Technology (Guangdong) Group

What Is Dawei Technology (Guangdong) Group's Debt?

The image below, which you can click on for greater detail, shows that Dawei Technology (Guangdong) Group had debt of CN¥504.4m at the end of September 2024, a reduction from CN¥1.37b over a year. On the flip side, it has CN¥348.7m in cash leading to net debt of about CN¥155.7m.

How Healthy Is Dawei Technology (Guangdong) Group's Balance Sheet?

According to the last reported balance sheet, Dawei Technology (Guangdong) Group had liabilities of CN¥595.6m due within 12 months, and liabilities of CN¥581.9m due beyond 12 months. On the other hand, it had cash of CN¥348.7m and CN¥78.4m worth of receivables due within a year. So its liabilities total CN¥750.3m more than the combination of its cash and short-term receivables.

Since publicly traded Dawei Technology (Guangdong) Group shares are worth a total of CN¥11.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Dawei Technology (Guangdong) Group has virtually no net debt, 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 Dawei Technology (Guangdong) Group 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 Dawei Technology (Guangdong) Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Dawei Technology (Guangdong) Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥98m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥99m and the profit of CN¥176m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Case in point: We've spotted 1 warning sign for Dawei Technology (Guangdong) Group you should be aware of.

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.