Is Beijing United Information TechnologyLtd (SHSE:603613) 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.' 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 can see that Beijing United Information Technology Co.,Ltd. (SHSE:603613) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 United Information TechnologyLtd

What Is Beijing United Information TechnologyLtd's Net Debt?

As you can see below, Beijing United Information TechnologyLtd had CN¥1.81b of debt at September 2024, down from CN¥2.01b a year prior. But on the other hand it also has CN¥5.97b in cash, leading to a CN¥4.16b net cash position.

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

According to the last reported balance sheet, Beijing United Information TechnologyLtd had liabilities of CN¥6.67b due within 12 months, and liabilities of CN¥789.1m due beyond 12 months. On the other hand, it had cash of CN¥5.97b and CN¥2.84b worth of receivables due within a year. So it can boast CN¥1.35b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing United Information TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing United Information TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Beijing United Information TechnologyLtd saw its EBIT drop by 4.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the last three years, Beijing United Information TechnologyLtd reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing United Information TechnologyLtd has CN¥4.16b in net cash and a decent-looking balance sheet. So we are not troubled with Beijing United Information TechnologyLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Beijing United Information TechnologyLtd you should be aware of, and 1 of them is significant.

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.