Is Hubei DOTI Micro Technology (SZSE:301183) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hubei DOTI Micro Technology Co., Ltd. (SZSE:301183) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Hubei DOTI Micro Technology

How Much Debt Does Hubei DOTI Micro Technology Carry?

As you can see below, at the end of September 2024, Hubei DOTI Micro Technology had CN¥96.1m of debt, up from CN¥19.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥341.8m in cash, leading to a CN¥245.6m net cash position.

How Strong Is Hubei DOTI Micro Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hubei DOTI Micro Technology had liabilities of CN¥366.3m due within 12 months and liabilities of CN¥29.8m due beyond that. On the other hand, it had cash of CN¥341.8m and CN¥394.9m worth of receivables due within a year. So it can boast CN¥340.5m more liquid assets than total liabilities.

This surplus suggests that Hubei DOTI Micro Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hubei DOTI Micro Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Hubei DOTI Micro Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥9.1m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Hubei DOTI Micro Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hubei DOTI Micro Technology 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 year, Hubei DOTI Micro Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hubei DOTI Micro Technology has net cash of CN¥245.6m, as well as more liquid assets than liabilities. So we are not troubled with Hubei DOTI Micro Technology's debt use. 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. For instance, we've identified 3 warning signs for Hubei DOTI Micro Technology that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.