Is Dongwu Cement International (HKG:695) A Risky Investment?

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. We can see that Dongwu Cement International Limited (HKG:695) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dongwu Cement International

What Is Dongwu Cement International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Dongwu Cement International had HK$163.2m of debt, an increase on HK$131.3m, over one year. But on the other hand it also has HK$450.0m in cash, leading to a HK$286.8m net cash position.

How Healthy Is Dongwu Cement International's Balance Sheet?

According to the last reported balance sheet, Dongwu Cement International had liabilities of HK$386.8m due within 12 months, and liabilities of HK$33.7m due beyond 12 months. Offsetting this, it had HK$450.0m in cash and HK$34.8m in receivables that were due within 12 months. So it can boast HK$64.3m more liquid assets than total liabilities.

This surplus suggests that Dongwu Cement International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dongwu Cement International boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dongwu Cement International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dongwu Cement International made a loss at the EBIT level, and saw its revenue drop to HK$310m, which is a fall of 40%. That makes us nervous, to say the least.

So How Risky Is Dongwu Cement International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Dongwu Cement International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$4.7m and booked a HK$39m accounting loss. Given it only has net cash of HK$286.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 1 warning sign for Dongwu Cement International that you should be aware of.

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. 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.