Health Check: How Prudently Does DPC Dash (HKG:1405) Use Debt?

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 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 DPC Dash Ltd (HKG:1405) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DPC Dash

How Much Debt Does DPC Dash Carry?

As you can see below, DPC Dash had CN¥200.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.02b in cash, leading to a CN¥819.2m net cash position.

How Strong Is DPC Dash's Balance Sheet?

We can see from the most recent balance sheet that DPC Dash had liabilities of CN¥1.02b falling due within a year, and liabilities of CN¥1.03b due beyond that. Offsetting these obligations, it had cash of CN¥1.02b as well as receivables valued at CN¥103.8m due within 12 months. So its liabilities total CN¥923.5m more than the combination of its cash and short-term receivables.

Since publicly traded DPC Dash shares are worth a total of CN¥7.06b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, DPC Dash boasts net cash, so it's fair to say it does not have a heavy debt load! 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 DPC Dash'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 DPC Dash wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to CN¥3.1b. With any luck the company will be able to grow its way to profitability.

So How Risky Is DPC Dash?

Although DPC Dash had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥220m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that DPC Dash is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. For riskier companies like DPC Dash I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.