These 4 Measures Indicate That Daohe Global Group (HKG:915) Is Using Debt Safely

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.' 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. Importantly, Daohe Global Group Limited (HKG:915) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Daohe Global Group

How Much Debt Does Daohe Global Group Carry?

As you can see below, Daohe Global Group had US$3.86m of debt at June 2024, down from US$4.55m a year prior. But it also has US$18.9m in cash to offset that, meaning it has US$15.1m net cash.

How Healthy Is Daohe Global Group's Balance Sheet?

According to the last reported balance sheet, Daohe Global Group had liabilities of US$14.7m due within 12 months, and liabilities of US$641.0k due beyond 12 months. Offsetting these obligations, it had cash of US$18.9m as well as receivables valued at US$4.23m due within 12 months. So it actually has US$7.76m more liquid assets than total liabilities.

This surplus liquidity suggests that Daohe Global Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Daohe Global Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Daohe Global Group grew its EBIT by 1,424% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Daohe Global Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$15.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 232% of that EBIT to free cash flow, bringing in US$939k. At the end of the day we're not concerned about Daohe Global Group's debt. 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. For example, we've discovered 2 warning signs for Daohe Global Group (1 is concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.