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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that DBG Technology Co., Ltd. (SZSE:300735) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is DBG Technology's Debt?

As you can see below, at the end of June 2024, DBG Technology had CN¥852.9m of debt, up from CN¥404.6m a year ago. Click the image for more detail. But it also has CN¥2.84b in cash to offset that, meaning it has CN¥1.99b net cash.

How Healthy Is DBG Technology's Balance Sheet?

According to the last reported balance sheet, DBG Technology had liabilities of CN¥2.46b due within 12 months, and liabilities of CN¥136.7m due beyond 12 months. On the other hand, it had cash of CN¥2.84b and CN¥1.50b worth of receivables due within a year. So it can boast CN¥1.75b more liquid assets than total liabilities.

This short term liquidity is a sign that DBG Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DBG Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DBG Technology grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. 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 DBG Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. DBG Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, DBG Technology recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that DBG Technology has net cash of CN¥1.99b, as well as more liquid assets than liabilities. And we liked the look of last year's 79% year-on-year EBIT growth. So is DBG Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for DBG Technology that you should be aware of before investing here.

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.