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 DR Corporation Limited (SZSE:301177) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is DR's Debt?
You can click the graphic below for the historical numbers, but it shows that DR had CN¥245.9m of debt in March 2024, down from CN¥485.3m, one year before. But it also has CN¥5.20b in cash to offset that, meaning it has CN¥4.96b net cash.
A Look At DR's Liabilities
According to the last reported balance sheet, DR had liabilities of CN¥769.2m due within 12 months, and liabilities of CN¥76.3m due beyond 12 months. Offsetting this, it had CN¥5.20b in cash and CN¥76.2m in receivables that were due within 12 months. So it actually has CN¥4.44b more liquid assets than total liabilities.
This luscious liquidity implies that DR's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that DR has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine DR'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.
Over 12 months, DR made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 40%. That makes us nervous, to say the least.
So How Risky Is DR?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months DR lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥22m of cash and made a loss of CN¥2.5m. With only CN¥4.96b 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 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. For instance, we've identified 1 warning sign for DR that you should be aware of.
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.
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