Here's Why Baoding Tianwei Baobian ElectricLtd (SHSE:600550) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Baoding Tianwei Baobian Electric Co.,Ltd. (SHSE:600550) makes use of debt. But is this debt a concern to shareholders?

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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Baoding Tianwei Baobian ElectricLtd

What Is Baoding Tianwei Baobian ElectricLtd's Net Debt?

As you can see below, at the end of March 2024, Baoding Tianwei Baobian ElectricLtd had CN¥2.18b of debt, up from CN¥1.64b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥690.9m, its net debt is less, at about CN¥1.49b.

How Healthy Is Baoding Tianwei Baobian ElectricLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Baoding Tianwei Baobian ElectricLtd had liabilities of CN¥5.02b due within 12 months and liabilities of CN¥919.3m due beyond that. Offsetting these obligations, it had cash of CN¥690.9m as well as receivables valued at CN¥2.21b due within 12 months. So its liabilities total CN¥3.04b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Baoding Tianwei Baobian ElectricLtd has a market capitalization of CN¥8.34b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Baoding Tianwei Baobian ElectricLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Baoding Tianwei Baobian ElectricLtd reported revenue of CN¥3.6b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Baoding Tianwei Baobian ElectricLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥74m at the EBIT level. 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¥209m. So we do think this stock is quite risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Baoding Tianwei Baobian ElectricLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.