The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, DPC Dash Ltd (HKG:1405) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does DPC Dash Carry?

The chart below, which you can click on for greater detail, shows that DPC Dash had CN¥200.0m in debt in June 2024; about the same as the year before. However, it does have CN¥1.09b in cash offsetting this, leading to net cash of CN¥889.3m.

A Look At DPC Dash's Liabilities

According to the last reported balance sheet, DPC Dash had liabilities of CN¥1.29b due within 12 months, and liabilities of CN¥1.07b due beyond 12 months. Offsetting this, it had CN¥1.09b in cash and CN¥11.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.26b.

Given DPC Dash has a market capitalization of CN¥8.19b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, DPC Dash also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, DPC Dash made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥61m in the last twelve months. 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 DPC Dash 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DPC Dash 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. Happily for any shareholders, DPC Dash actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While DPC Dash does have more liabilities than liquid assets, it also has net cash of CN¥889.3m. And it impressed us with free cash flow of CN¥384m, being 631% of its EBIT. So we don't have any problem with DPC Dash's use of debt. We'd be motivated to research the stock further if we found out that DPC Dash insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.