Is Dongguan Mentech Optical & Magnetic (SZSE:002902) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Dongguan Mentech Optical & Magnetic Co., Ltd. (SZSE:002902) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dongguan Mentech Optical & Magnetic

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

The image below, which you can click on for greater detail, shows that at March 2024 Dongguan Mentech Optical & Magnetic had debt of CN¥560.6m, up from CN¥258.5m in one year. But on the other hand it also has CN¥638.9m in cash, leading to a CN¥78.4m net cash position.

How Strong Is Dongguan Mentech Optical & Magnetic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dongguan Mentech Optical & Magnetic had liabilities of CN¥1.42b due within 12 months and liabilities of CN¥218.7m due beyond that. Offsetting these obligations, it had cash of CN¥638.9m as well as receivables valued at CN¥651.9m due within 12 months. So it has liabilities totalling CN¥348.3m more than its cash and near-term receivables, combined.

Given Dongguan Mentech Optical & Magnetic has a market capitalization of CN¥5.67b, 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. While it does have liabilities worth noting, Dongguan Mentech Optical & Magnetic also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Dongguan Mentech Optical & Magnetic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Dongguan Mentech Optical & Magnetic had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥1.8b. To be frank that doesn't bode well.

So How Risky Is Dongguan Mentech Optical & Magnetic?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Dongguan Mentech Optical & Magnetic lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥202m of cash and made a loss of CN¥288m. But the saving grace is the CN¥78.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Dongguan Mentech Optical & Magnetic you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.