Is D&G Technology Holding (HKG:1301) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that D&G Technology Holding Company Limited (HKG:1301) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for D&G Technology Holding

What Is D&G Technology Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that D&G Technology Holding had CN¥19.6m of debt in December 2021, down from CN¥31.1m, one year before. But on the other hand it also has CN¥199.6m in cash, leading to a CN¥180.0m net cash position.

A Look At D&G Technology Holding's Liabilities

According to the last reported balance sheet, D&G Technology Holding had liabilities of CN¥246.4m due within 12 months, and liabilities of CN¥6.08m due beyond 12 months. Offsetting this, it had CN¥199.6m in cash and CN¥214.6m in receivables that were due within 12 months. So it can boast CN¥161.8m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is D&G Technology Holding'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.

Over 12 months, D&G Technology Holding reported revenue of CN¥429m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 made a statutory profit of CN¥11m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for D&G Technology Holding that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.