We Think DaChan Food (Asia) (HKG:3999) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that DaChan Food (Asia) Limited (HKG:3999) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for DaChan Food (Asia)

How Much Debt Does DaChan Food (Asia) Carry?

As you can see below, DaChan Food (Asia) had CN¥389.8m of debt at September 2022, down from CN¥503.6m a year prior. But on the other hand it also has CN¥660.6m in cash, leading to a CN¥270.7m net cash position.

How Healthy Is DaChan Food (Asia)'s Balance Sheet?

According to the last reported balance sheet, DaChan Food (Asia) had liabilities of CN¥952.0m due within 12 months, and liabilities of CN¥295.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥660.6m as well as receivables valued at CN¥546.0m due within 12 months. So its liabilities total CN¥40.6m more than the combination of its cash and short-term receivables.

Given DaChan Food (Asia) has a market capitalization of CN¥490.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, DaChan Food (Asia) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, DaChan Food (Asia) grew its EBIT by 443% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DaChan Food (Asia) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While DaChan Food (Asia) 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. During the last three years, DaChan Food (Asia) generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about DaChan Food (Asia)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥270.7m. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥57m. So is DaChan Food (Asia)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with DaChan Food (Asia) .

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.

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.