Here's Why DPC Dash (HKG:1405) Can Manage Its Debt Responsibly

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.' 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. We note that DPC Dash Ltd (HKG:1405) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about DPC Dash. View them for free.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does DPC Dash Carry?

As you can see below, DPC Dash had CN¥200.0m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.07b in cash offsetting this, leading to net cash of CN¥869.3m.

A Look At DPC Dash's Liabilities

According to the last reported balance sheet, DPC Dash had liabilities of CN¥1.52b due within 12 months, and liabilities of CN¥1.12b due beyond 12 months. On the other hand, it had cash of CN¥1.07b and CN¥157.1m worth of receivables due within a year. So it has liabilities totalling CN¥1.41b more than its cash and near-term receivables, combined.

Given DPC Dash has a market capitalization of CN¥11.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, DPC Dash also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for DPC Dash

We also note that DPC Dash improved its EBIT from a last year's loss to a positive CN¥154m. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While DPC Dash has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, DPC Dash actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although DPC Dash's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥869.3m. And it impressed us with free cash flow of CN¥402m, being 262% of its EBIT. So we don't have any problem with DPC Dash's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with DPC Dash .

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.