Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Guangdong DP Co.,Ltd. (SZSE:300808) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Guangdong DPLtd Carry?

As you can see below, Guangdong DPLtd had CN¥129.9m of debt at September 2024, down from CN¥191.2m a year prior. On the flip side, it has CN¥81.5m in cash leading to net debt of about CN¥48.4m.

How Strong Is Guangdong DPLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangdong DPLtd had liabilities of CN¥95.0m falling due within a year, and liabilities of CN¥145.6m due beyond that. Offsetting this, it had CN¥81.5m in cash and CN¥181.9m in receivables that were due within 12 months. So it actually has CN¥22.7m more liquid assets than total liabilities.

Having regard to Guangdong DPLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Guangdong DPLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong DPLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangdong DPLtd had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥408m. We would much prefer see growth.

Caveat Emptor

Not only did Guangdong DPLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥18m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Guangdong DPLtd you should be aware of, and 1 of them is potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.