Daohe Global Group (HKG:915) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Daohe Global Group Limited (HKG:915) makes use of debt. But is this debt a concern to shareholders?

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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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Daohe Global Group's Debt?

The image below, which you can click on for greater detail, shows that Daohe Global Group had debt of US$3.86m at the end of December 2024, a reduction from US$4.15m over a year. However, it does have US$21.2m in cash offsetting this, leading to net cash of US$17.3m.

A Look At Daohe Global Group's Liabilities

The latest balance sheet data shows that Daohe Global Group had liabilities of US$13.6m due within a year, and liabilities of US$488.0k falling due after that. Offsetting these obligations, it had cash of US$21.2m as well as receivables valued at US$4.86m due within 12 months. So it actually has US$12.0m more liquid assets than total liabilities.

This luscious liquidity implies that Daohe Global Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Daohe Global Group has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Daohe Global Group

In addition to that, we're happy to report that Daohe Global Group has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Daohe Global 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Daohe Global Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Daohe Global Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Daohe Global Group has net cash of US$17.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$2.0m, being 245% of its EBIT. The bottom line is that Daohe Global Group's use of debt is absolutely fine. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Daohe Global Group , and understanding them should be part of your investment process.

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.