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. As with many other companies Guangdong Dowstone Technology Co., Ltd. (SZSE:300409) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Guangdong Dowstone Technology
How Much Debt Does Guangdong Dowstone Technology Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Guangdong Dowstone Technology had CN¥5.90b of debt, an increase on CN¥3.42b, over one year. On the flip side, it has CN¥4.65b in cash leading to net debt of about CN¥1.25b.
How Healthy Is Guangdong Dowstone Technology's Balance Sheet?
The latest balance sheet data shows that Guangdong Dowstone Technology had liabilities of CN¥4.58b due within a year, and liabilities of CN¥3.55b falling due after that. On the other hand, it had cash of CN¥4.65b and CN¥2.24b worth of receivables due within a year. So its liabilities total CN¥1.23b more than the combination of its cash and short-term receivables.
Since publicly traded Guangdong Dowstone Technology shares are worth a total of CN¥6.64b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Dowstone Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Guangdong Dowstone Technology had a loss before interest and tax, and actually shrunk its revenue by 4.5%, to CN¥6.9b. That's not what we would hope to see.
Caveat Emptor
Importantly, Guangdong Dowstone Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥133m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥365m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangdong Dowstone Technology's profit, revenue, and operating cashflow have changed over the last few years.
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.
