We Think Dawning Information Industry (SHSE:603019) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Dawning Information Industry Co., Ltd. (SHSE:603019) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Dawning Information Industry

What Is Dawning Information Industry's Net Debt?

As you can see below, at the end of September 2023, Dawning Information Industry had CN¥2.88b of debt, up from CN¥2.33b a year ago. Click the image for more detail. However, it does have CN¥5.43b in cash offsetting this, leading to net cash of CN¥2.54b.

How Healthy Is Dawning Information Industry's Balance Sheet?

We can see from the most recent balance sheet that Dawning Information Industry had liabilities of CN¥5.01b falling due within a year, and liabilities of CN¥7.46b due beyond that. On the other hand, it had cash of CN¥5.43b and CN¥2.61b worth of receivables due within a year. So its liabilities total CN¥4.44b more than the combination of its cash and short-term receivables.

Of course, Dawning Information Industry has a market capitalization of CN¥71.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dawning Information Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Dawning Information Industry grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its 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 Dawning Information Industry's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Dawning Information Industry burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Dawning Information Industry's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.54b. And it impressed us with its EBIT growth of 84% over the last year. So we don't have any problem with Dawning Information Industry's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dawning Information Industry's earnings per share history for free.

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.