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.' 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 note that Dosilicon Co., Ltd. (SHSE:688110) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Dosilicon
What Is Dosilicon's Net Debt?
The image below, which you can click on for greater detail, shows that Dosilicon had debt of CN¥42.4m at the end of September 2023, a reduction from CN¥68.0m over a year. However, it does have CN¥2.18b in cash offsetting this, leading to net cash of CN¥2.14b.
A Look At Dosilicon's Liabilities
We can see from the most recent balance sheet that Dosilicon had liabilities of CN¥159.2m falling due within a year, and liabilities of CN¥18.0m due beyond that. On the other hand, it had cash of CN¥2.18b and CN¥90.7m worth of receivables due within a year. So it can boast CN¥2.10b more liquid assets than total liabilities.
It's good to see that Dosilicon 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, Dosilicon boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dosilicon 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.
In the last year Dosilicon had a loss before interest and tax, and actually shrunk its revenue by 56%, to CN¥569m. To be frank that doesn't bode well.
So How Risky Is Dosilicon?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Dosilicon had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥346m of cash and made a loss of CN¥232m. With only CN¥2.14b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Dosilicon's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
