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 Beijing Beida Jade Bird Universal Sci-Tech Company Limited (HKG:8095) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Beijing Beida Jade Bird Universal Sci-Tech
What Is Beijing Beida Jade Bird Universal Sci-Tech's Debt?
As you can see below, at the end of June 2024, Beijing Beida Jade Bird Universal Sci-Tech had CN¥974.6m of debt, up from CN¥936.3m a year ago. Click the image for more detail. However, it also had CN¥177.8m in cash, and so its net debt is CN¥796.9m.
How Strong Is Beijing Beida Jade Bird Universal Sci-Tech's Balance Sheet?
We can see from the most recent balance sheet that Beijing Beida Jade Bird Universal Sci-Tech had liabilities of CN¥1.10b falling due within a year, and liabilities of CN¥465.3m due beyond that. Offsetting these obligations, it had cash of CN¥177.8m as well as receivables valued at CN¥1.05b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥343.0m.
This is a mountain of leverage relative to its market capitalization of CN¥445.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Beida Jade Bird Universal Sci-Tech 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.
Over 12 months, Beijing Beida Jade Bird Universal Sci-Tech reported revenue of CN¥552m, which is a gain of 31%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Beijing Beida Jade Bird Universal Sci-Tech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥247m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥188m. So in short it's a really risky stock. 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. For example - Beijing Beida Jade Bird Universal Sci-Tech has 1 warning sign we think you should be aware of.
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.