Is Digiwin (SZSE:300378) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Digiwin Co., Ltd. (SZSE:300378) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Digiwin

What Is Digiwin's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Digiwin had CN¥30.0m of debt in June 2024, down from CN¥122.8m, one year before. However, it does have CN¥693.0m in cash offsetting this, leading to net cash of CN¥663.0m.

How Healthy Is Digiwin's Balance Sheet?

We can see from the most recent balance sheet that Digiwin had liabilities of CN¥751.5m falling due within a year, and liabilities of CN¥59.9m due beyond that. On the other hand, it had cash of CN¥693.0m and CN¥660.9m worth of receivables due within a year. So it can boast CN¥542.5m more liquid assets than total liabilities.

This surplus suggests that Digiwin has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Digiwin boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Digiwin grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Digiwin's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Digiwin has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Digiwin recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Digiwin has net cash of CN¥663.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 18% over the last year. So we don't have any problem with Digiwin's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Digiwin that you should be aware of before investing here.

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.