Stock Analysis

Does Dowway Holdings (HKG:8403) Have A Healthy Balance Sheet?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Dowway Holdings Limited (HKG:8403) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 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 Dowway Holdings

What Is Dowway Holdings's Net Debt?

As you can see below, at the end of September 2023, Dowway Holdings had CN¥14.6m of debt, up from CN¥10.0m a year ago. Click the image for more detail. However, it also had CN¥14.1m in cash, and so its net debt is CN¥523.0k.

SEHK:8403 Debt to Equity History November 24th 2023

A Look At Dowway Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Dowway Holdings had liabilities of CN¥100.9m due within 12 months and liabilities of CN¥1.68m due beyond that. Offsetting these obligations, it had cash of CN¥14.1m as well as receivables valued at CN¥82.9m due within 12 months. So it has liabilities totalling CN¥5.59m more than its cash and near-term receivables, combined.

Given Dowway Holdings has a market capitalization of CN¥56.2m, 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. Carrying virtually no net debt, Dowway Holdings has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dowway Holdings will need earnings to service that debt. 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, Dowway Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥150m, which is a fall of 3.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Dowway Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥39m 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. 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¥41m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Dowway Holdings (2 are a bit concerning) 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.