Is Da Sen Holdings Group (HKG:1580) A Risky Investment?

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 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 Da Sen Holdings Group Limited (HKG:1580) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Da Sen Holdings Group

How Much Debt Does Da Sen Holdings Group Carry?

The chart below, which you can click on for greater detail, shows that Da Sen Holdings Group had CN¥57.5m in debt in December 2020; about the same as the year before. On the flip side, it has CN¥5.76m in cash leading to net debt of about CN¥51.7m.

How Healthy Is Da Sen Holdings Group's Balance Sheet?

According to the last reported balance sheet, Da Sen Holdings Group had liabilities of CN¥106.0m due within 12 months, and liabilities of CN¥317.0k due beyond 12 months. Offsetting this, it had CN¥5.76m in cash and CN¥97.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥3.42m more than its cash and near-term receivables, combined.

Of course, Da Sen Holdings Group has a market capitalization of CN¥130.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Da Sen Holdings Group'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, Da Sen Holdings Group made a loss at the EBIT level, and saw its revenue drop to CN¥175m, which is a fall of 45%. That makes us nervous, to say the least.

Caveat Emptor

While Da Sen Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥124m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥211m. So to be blunt we do think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Da Sen Holdings Group (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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