We Think Da Sen Holdings Group (HKG:1580) Has A Fair Chunk Of Debt

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.' 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 Da Sen Holdings Group Limited (HKG:1580) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Da Sen Holdings Group

What Is Da Sen Holdings Group's Debt?

As you can see below, at the end of December 2021, Da Sen Holdings Group had CN¥62.6m of debt, up from CN¥57.9m a year ago. Click the image for more detail. On the flip side, it has CN¥3.26m in cash leading to net debt of about CN¥59.4m.

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

According to the last reported balance sheet, Da Sen Holdings Group had liabilities of CN¥130.3m due within 12 months, and liabilities of CN¥267.0k due beyond 12 months. On the other hand, it had cash of CN¥3.26m and CN¥71.7m worth of receivables due within a year. So it has liabilities totalling CN¥55.7m more than its cash and near-term receivables, combined.

Da Sen Holdings Group has a market capitalization of CN¥114.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

In the last year Da Sen Holdings Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Da Sen Holdings Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥98m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥119m. So we do think this stock is quite risky. 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. Be aware that Da Sen Holdings Group is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.