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. Importantly, Daheng New Epoch Technology Inc. (SHSE:600288) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Daheng New Epoch Technology's Debt?
As you can see below, Daheng New Epoch Technology had CN¥127.4m of debt at September 2024, down from CN¥218.7m a year prior. But on the other hand it also has CN¥759.1m in cash, leading to a CN¥631.7m net cash position.
A Look At Daheng New Epoch Technology's Liabilities
According to the last reported balance sheet, Daheng New Epoch Technology had liabilities of CN¥836.4m due within 12 months, and liabilities of CN¥14.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥759.1m as well as receivables valued at CN¥775.2m due within 12 months. So it actually has CN¥683.4m more liquid assets than total liabilities.
It's good to see that Daheng New Epoch Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Daheng New Epoch Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Daheng New Epoch Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Daheng New Epoch Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 13%. We would much prefer see growth.
So How Risky Is Daheng New Epoch Technology?
While Daheng New Epoch Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥54m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Daheng New Epoch Technology you should be aware of, and 1 of them is a bit concerning.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.