These 4 Measures Indicate That Dawning Information Industry (SHSE:603019) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Dawning Information Industry

What Is Dawning Information Industry's Debt?

The image below, which you can click on for greater detail, shows that Dawning Information Industry had debt of CN¥1.52b at the end of September 2024, a reduction from CN¥2.87b over a year. But it also has CN¥3.43b in cash to offset that, meaning it has CN¥1.90b net cash.

How Strong Is Dawning Information Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dawning Information Industry had liabilities of CN¥4.38b due within 12 months and liabilities of CN¥8.21b due beyond that. Offsetting this, it had CN¥3.43b in cash and CN¥3.48b in receivables that were due within 12 months. So it has liabilities totalling CN¥5.68b more than its cash and near-term receivables, combined.

Of course, Dawning Information Industry has a titanic market capitalization of CN¥109.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Dawning Information Industry also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Dawning Information Industry's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dawning Information Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Dawning Information Industry saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥1.90b in net cash. So while Dawning Information Industry does not have a great balance sheet, it's certainly not too bad. 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. We've identified 1 warning sign with Dawning Information Industry , and understanding them should be part of your investment process.

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.