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.' 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. Importantly, Dawei Technology (Guangdong) Group Co., Ltd. (SHSE:600589) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dawei Technology (Guangdong) Group's Debt?

The image below, which you can click on for greater detail, shows that Dawei Technology (Guangdong) Group had debt of CN¥504.4m at the end of September 2024, a reduction from CN¥1.37b over a year. However, it does have CN¥348.7m in cash offsetting this, leading to net debt of about CN¥155.7m.

How Healthy Is Dawei Technology (Guangdong) Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dawei Technology (Guangdong) Group had liabilities of CN¥595.6m due within 12 months and liabilities of CN¥581.9m due beyond that. Offsetting these obligations, it had cash of CN¥348.7m as well as receivables valued at CN¥78.4m due within 12 months. So its liabilities total CN¥750.3m more than the combination of its cash and short-term receivables.

Since publicly traded Dawei Technology (Guangdong) Group shares are worth a total of CN¥7.13b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dawei Technology (Guangdong) Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Dawei Technology (Guangdong) Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Dawei Technology (Guangdong) Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥98m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥99m and the profit of CN¥176m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Dawei Technology (Guangdong) Group (at least 1 which is significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.