Is Dawei Technology (Guangdong) Group (SHSE:600589) taking on too much debt?

David Iben put it best when he said, “Volatility is not a risk we care about. We care about avoiding permanent loss of capital.” When you think about how risky a particular stock is, it is It may be obvious that you need to consider debt, because too much debt can ruin a business. We can see that Dawei Technology (Guangdong) Group Co., Ltd. (SHSE:600589) uses debt in its business. But the more important question is: How much risk does this debt pose?

What risk does debt bring with it?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels together.

Check out our latest analysis for Dawei Technology (Guangdong) Group

How much debt does Dawei Technology (Guangdong) Group have?

As you can see below, Dawei Technology (Guangdong) Group had CN¥504.4 million in debt as of September 2024, down from CN¥1.37 million the year before. On the other hand, the company has CN¥348.7m in cash, leading to net debt of about CN¥155.7m.

How healthy is Dawei Technology (Guangdong) Group’s balance sheet?

The most recent balance sheet shows that Dawei Technology (Guangdong) Group had liabilities of CN¥595.6m within a year and liabilities of CN¥581.9m beyond that. On the other hand, it had cash worth CN¥348.7m and receivables valued at CN¥78.4m due within a year. So it has liabilities totaling CN¥750.3m more than its cash and short-term receivables combined.

Of course, Dawei Technology (Guangdong) Group has a market capitalization of CN¥7.79b, so these liabilities are probably manageable. But there are enough liabilities that we would definitely recommend that shareholders keep an eye on the balance sheet in the future. When analyzing debt levels, the balance sheet is the obvious place to start. But it is Dawei Technology (Guangdong) Group’s earnings that will influence how its balance sheet performs in the future. So if you’re interested in discovering more about the company’s earnings, it might be worth checking out this graph of its long-term earnings trend.

Over a 12-month period, Dawei Technology (Guangdong) Group managed to keep its revenues fairly stable and did not report positive earnings before interest and taxes. That’s hardly impressive, but it’s not bad either.

Precautionary measure

Importantly, Dawei Technology (Guangdong) Group posted earnings before interest and tax (EBIT) last year. In fact, at the EBIT level, the company lost CN¥98 million. If we look at this and remember the liabilities on the balance sheet relative to its cash, it seems unwise to us for the company to have debt. Frankly, we think the balance sheet is far from fit, although it could be improved over time. Surprisingly, we note that the company actually reported positive free cash flow of CN¥99m and profit of CN¥176m. So if we focus on these metrics, there seems to be a chance that the company can manage its debt without much trouble. The balance sheet is clearly the area you should focus on when analyzing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be difficult to identify. Every company has them, and we discovered them 2 warning signs for Dawei Technology (Guangdong) Group (1 of which is a bit unpleasant!) is something you should know.

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.