These 4 Measures Indicate That Daqo New Energy (NYSE:DQ) Is Using Debt Safely

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.' 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. Importantly, Daqo New Energy Corp. (NYSE:DQ) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Daqo New Energy

How Much Debt Does Daqo New Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Daqo New Energy had US$140.0m of debt, an increase on none, over one year. But it also has US$4.14b in cash to offset that, meaning it has US$4.00b net cash.

A Look At Daqo New Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Daqo New Energy had liabilities of US$940.9m due within 12 months and liabilities of US$266.1m due beyond that. Offsetting this, it had US$4.14b in cash and US$791.3m in receivables that were due within 12 months. So it can boast US$3.72b more liquid assets than total liabilities.

This surplus strongly suggests that Daqo New Energy has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Daqo New Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Daqo New Energy has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Daqo New Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Daqo New Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Daqo New Energy recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Daqo New Energy has net cash of US$4.00b and plenty of liquid assets. And we liked the look of last year's 56% year-on-year EBIT growth. So we don't think Daqo New Energy's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Daqo New Energy (1 is potentially serious) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.