Is Dawning Information Industry (SHSE:603019) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dawning Information Industry Co., Ltd. (SHSE:603019) does use debt in its business. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

How Much Debt Does Dawning Information Industry Carry?

You can click the graphic below for the historical numbers, but it shows that Dawning Information Industry had CN¥914.5m of debt in December 2024, down from CN¥2.81b, one year before. But on the other hand it also has CN¥6.53b in cash, leading to a CN¥5.61b net cash position.

A Look At Dawning Information Industry's Liabilities

The latest balance sheet data shows that Dawning Information Industry had liabilities of CN¥5.59b due within a year, and liabilities of CN¥9.70b falling due after that. On the other hand, it had cash of CN¥6.53b and CN¥2.79b worth of receivables due within a year. So its liabilities total CN¥5.97b more than the combination of its cash and short-term receivables.

Since publicly traded Dawning Information Industry shares are worth a very impressive total of CN¥98.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dawning Information Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Dawning Information Industry

The good news is that Dawning Information Industry has increased its EBIT by 2.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dawning Information Industry can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dawning Information Industry 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. Looking at the most recent three years, Dawning Information Industry recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dawning Information Industry has CN¥5.61b in net cash. On top of that, it increased its EBIT by 2.1% in the last twelve months. So we are not troubled with Dawning Information Industry's debt use. 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. Be aware that Dawning Information Industry is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.