Is Beijing United Information TechnologyLtd (SHSE:603613) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Beijing United Information Technology Co.,Ltd. (SHSE:603613) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beijing United Information TechnologyLtd

What Is Beijing United Information TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing United Information TechnologyLtd had CN¥1.87b of debt in June 2024, down from CN¥2.04b, one year before. But it also has CN¥6.23b in cash to offset that, meaning it has CN¥4.37b net cash.

How Strong Is Beijing United Information TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Beijing United Information TechnologyLtd had liabilities of CN¥6.43b due within 12 months, and liabilities of CN¥769.2m due beyond 12 months. Offsetting this, it had CN¥6.23b in cash and CN¥2.55b in receivables that were due within 12 months. So it can boast CN¥1.59b more liquid assets than total liabilities.

This surplus suggests that Beijing United Information TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing United Information TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Beijing United Information TechnologyLtd has increased its EBIT by 9.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing United Information TechnologyLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beijing United Information TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Beijing United Information TechnologyLtd's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing United Information TechnologyLtd has CN¥4.37b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.4% over the last year. So we are not troubled with Beijing United Information TechnologyLtd's debt use. 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. We've identified 2 warning signs with Beijing United Information TechnologyLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.