These 4 Measures Indicate That Dalian Dalicap TechnologyLtd (SZSE:301566) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Dalian Dalicap Technology Co.,Ltd. (SZSE:301566) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Dalian Dalicap TechnologyLtd

What Is Dalian Dalicap TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Dalian Dalicap TechnologyLtd had debt of CN¥100.0m at the end of March 2024, a reduction from CN¥187.5m over a year. But it also has CN¥914.9m in cash to offset that, meaning it has CN¥814.8m net cash.

How Healthy Is Dalian Dalicap TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Dalian Dalicap TechnologyLtd had liabilities of CN¥83.0m falling due within a year, and liabilities of CN¥101.7m due beyond that. Offsetting this, it had CN¥914.9m in cash and CN¥117.1m in receivables that were due within 12 months. So it actually has CN¥847.2m more liquid assets than total liabilities.

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

In fact Dalian Dalicap TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dalian Dalicap TechnologyLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dalian Dalicap TechnologyLtd 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 most recent three years, Dalian Dalicap TechnologyLtd recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dalian Dalicap TechnologyLtd has net cash of CN¥814.8m, as well as more liquid assets than liabilities. So we are not troubled with Dalian Dalicap TechnologyLtd'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. Case in point: We've spotted 1 warning sign for Dalian Dalicap TechnologyLtd you should be aware of.

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.