Is Sichuan Discovery Dream Science & TechnologyLtd (SZSE:301213) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sichuan Discovery Dream Science & TechnologyLtd

What Is Sichuan Discovery Dream Science & TechnologyLtd's Net Debt?

As you can see below, Sichuan Discovery Dream Science & TechnologyLtd had CN¥32.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥289.9m in cash offsetting this, leading to net cash of CN¥257.8m.

A Look At Sichuan Discovery Dream Science & TechnologyLtd's Liabilities

The latest balance sheet data shows that Sichuan Discovery Dream Science & TechnologyLtd had liabilities of CN¥110.8m due within a year, and liabilities of CN¥8.31m falling due after that. Offsetting this, it had CN¥289.9m in cash and CN¥293.1m in receivables that were due within 12 months. So it can boast CN¥464.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Discovery Dream Science & TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sichuan Discovery Dream Science & TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sichuan Discovery Dream Science & TechnologyLtd'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 Sichuan Discovery Dream Science & TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CN¥123m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sichuan Discovery Dream Science & TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sichuan Discovery Dream Science & TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥108m and booked a CN¥1.9m accounting loss. With only CN¥257.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Sichuan Discovery Dream Science & TechnologyLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sichuan Discovery Dream Science & TechnologyLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.