The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Dingdong (Cayman) Limited (NYSE:DDL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Dingdong (Cayman)'s Debt?
You can click the graphic below for the historical numbers, but it shows that Dingdong (Cayman) had CN¥1.83b of debt in June 2024, down from CN¥3.68b, one year before. However, its balance sheet shows it holds CN¥4.16b in cash, so it actually has CN¥2.32b net cash.
A Look At Dingdong (Cayman)'s Liabilities
We can see from the most recent balance sheet that Dingdong (Cayman) had liabilities of CN¥5.11b falling due within a year, and liabilities of CN¥741.9m due beyond that. Offsetting these obligations, it had cash of CN¥4.16b as well as receivables valued at CN¥112.0m due within 12 months. So it has liabilities totalling CN¥1.58b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Dingdong (Cayman) has a market capitalization of CN¥3.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Dingdong (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Dingdong (Cayman) turned things around in the last 12 months, delivering and EBIT of CN¥53m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dingdong (Cayman) 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dingdong (Cayman) 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. Happily for any shareholders, Dingdong (Cayman) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While Dingdong (Cayman) does have more liabilities than liquid assets, it also has net cash of CN¥2.32b. And it impressed us with free cash flow of CN¥507m, being 960% of its EBIT. So we are not troubled with Dingdong (Cayman)'s debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Dingdong (Cayman) .
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.