David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Guangdong Dtech Technology Co., Ltd. (SZSE:301377) does use debt in its business. 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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Guangdong Dtech Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Guangdong Dtech Technology had debt of CN¥267.2m, up from CN¥177.8m in one year. However, its balance sheet shows it holds CN¥713.6m in cash, so it actually has CN¥446.3m net cash.

How Healthy Is Guangdong Dtech Technology's Balance Sheet?

According to the last reported balance sheet, Guangdong Dtech Technology had liabilities of CN¥672.0m due within 12 months, and liabilities of CN¥181.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥713.6m as well as receivables valued at CN¥803.0m due within 12 months. So it can boast CN¥663.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Dtech Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangdong Dtech Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Guangdong Dtech Technology's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Dtech Technology'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangdong Dtech Technology 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. Considering the last three years, Guangdong Dtech Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Dtech Technology has CN¥446.3m in net cash and a decent-looking balance sheet. So while Guangdong Dtech Technology does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Guangdong Dtech Technology .

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.

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