Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Guangdong DFP New Material Group Co., Ltd. (SHSE:601515) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guangdong DFP New Material Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangdong DFP New Material Group had CN¥475.2m of debt, an increase on CN¥334.8m, over one year. But on the other hand it also has CN¥1.93b in cash, leading to a CN¥1.45b net cash position.

A Look At Guangdong DFP New Material Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong DFP New Material Group had liabilities of CN¥540.5m due within 12 months and liabilities of CN¥717.4m due beyond that. Offsetting this, it had CN¥1.93b in cash and CN¥695.5m in receivables that were due within 12 months. So it can boast CN¥1.36b more liquid assets than total liabilities.

It's good to see that Guangdong DFP New Material Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Guangdong DFP New Material Group 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 ultimately the future profitability of the business will decide if Guangdong DFP New Material Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Guangdong DFP New Material Group had a loss before interest and tax, and actually shrunk its revenue by 49%, to CN¥1.6b. To be frank that doesn't bode well.

So How Risky Is Guangdong DFP New Material Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Guangdong DFP New Material Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥455m of cash and made a loss of CN¥277m. With only CN¥1.45b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Guangdong DFP New Material Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.