Da-Li DevelopmentLtd (TWSE:6177) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Da-Li Development Co.,Ltd. (TWSE:6177) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Da-Li DevelopmentLtd

What Is Da-Li DevelopmentLtd's Debt?

The image below, which you can click on for greater detail, shows that Da-Li DevelopmentLtd had debt of NT$18.0b at the end of December 2023, a reduction from NT$22.6b over a year. However, because it has a cash reserve of NT$2.30b, its net debt is less, at about NT$15.7b.

A Look At Da-Li DevelopmentLtd's Liabilities

According to the last reported balance sheet, Da-Li DevelopmentLtd had liabilities of NT$21.2b due within 12 months, and liabilities of NT$4.65b due beyond 12 months. Offsetting these obligations, it had cash of NT$2.30b as well as receivables valued at NT$299.9m due within 12 months. So its liabilities total NT$23.2b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$25.3b, so it does suggest shareholders should keep an eye on Da-Li DevelopmentLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Strangely Da-Li DevelopmentLtd has a sky high EBITDA ratio of 5.9, implying high debt, but a strong interest coverage of 336. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Da-Li DevelopmentLtd grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Da-Li DevelopmentLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Da-Li DevelopmentLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Da-Li DevelopmentLtd's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its net debt to EBITDA has the opposite effect. All these things considered, it appears that Da-Li DevelopmentLtd can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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 example, we've discovered 1 warning sign for Da-Li DevelopmentLtd 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.

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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.