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 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. As with many other companies D&G Technology Holding Company Limited (HKG:1301) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does D&G Technology Holding Carry?
You can click the graphic below for the historical numbers, but it shows that D&G Technology Holding had CN¥31.1m of debt in December 2020, down from CN¥77.6m, one year before. But on the other hand it also has CN¥188.8m in cash, leading to a CN¥157.6m net cash position.
How Healthy Is D&G Technology Holding's Balance Sheet?
The latest balance sheet data shows that D&G Technology Holding had liabilities of CN¥269.2m due within a year, and liabilities of CN¥6.76m falling due after that. Offsetting these obligations, it had cash of CN¥188.8m as well as receivables valued at CN¥211.4m due within 12 months. So it can boast CN¥124.2m more liquid assets than total liabilities.
This surplus suggests that D&G Technology Holding is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, D&G Technology Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since D&G Technology Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year D&G Technology Holding had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥379m. That's not what we would hope to see.
So How Risky Is D&G Technology Holding?
Although D&G Technology Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥118m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with D&G Technology Holding (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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