Does Dongguan Mentech Optical & Magnetic (SZSE:002902) Have A Healthy Balance Sheet?

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 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 Dongguan Mentech Optical & Magnetic Co., Ltd. (SZSE:002902) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dongguan Mentech Optical & Magnetic

What Is Dongguan Mentech Optical & Magnetic's Net Debt?

As you can see below, Dongguan Mentech Optical & Magnetic had CN¥445.2m of debt at September 2024, down from CN¥560.8m a year prior. However, it also had CN¥362.9m in cash, and so its net debt is CN¥82.3m.

A Look At Dongguan Mentech Optical & Magnetic's Liabilities

We can see from the most recent balance sheet that Dongguan Mentech Optical & Magnetic had liabilities of CN¥1.56b falling due within a year, and liabilities of CN¥90.4m due beyond that. On the other hand, it had cash of CN¥362.9m and CN¥746.5m worth of receivables due within a year. So it has liabilities totalling CN¥536.5m more than its cash and near-term receivables, combined.

Given Dongguan Mentech Optical & Magnetic has a market capitalization of CN¥4.70b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dongguan Mentech Optical & Magnetic's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dongguan Mentech Optical & Magnetic made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Dongguan Mentech Optical & Magnetic's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥316m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥228m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Dongguan Mentech Optical & Magnetic (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.