Is Beijing Jingwei Hirain Technologies (SHSE:688326) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Beijing Jingwei Hirain Technologies Co., Inc. (SHSE:688326) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Jingwei Hirain Technologies

What Is Beijing Jingwei Hirain Technologies's Net Debt?

As you can see below, at the end of September 2024, Beijing Jingwei Hirain Technologies had CN¥620.9m of debt, up from CN¥135.4m a year ago. Click the image for more detail. However, it does have CN¥1.83b in cash offsetting this, leading to net cash of CN¥1.21b.

How Strong Is Beijing Jingwei Hirain Technologies' Balance Sheet?

We can see from the most recent balance sheet that Beijing Jingwei Hirain Technologies had liabilities of CN¥4.32b falling due within a year, and liabilities of CN¥435.5m due beyond that. Offsetting this, it had CN¥1.83b in cash and CN¥1.89b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.04b more than its cash and near-term receivables, combined.

Given Beijing Jingwei Hirain Technologies has a market capitalization of CN¥10.6b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Beijing Jingwei Hirain Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing Jingwei Hirain Technologies 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.

In the last year Beijing Jingwei Hirain Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to CN¥5.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Beijing Jingwei Hirain Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Beijing Jingwei Hirain Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥487m accounting loss. However, it has net cash of CN¥1.21b, so it has a bit of time before it will need more capital. Beijing Jingwei Hirain Technologies's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Beijing Jingwei Hirain Technologies that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.