Is Beijing SinoHytec (SHSE:688339) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Beijing SinoHytec Co., Ltd. (SHSE:688339) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing SinoHytec

What Is Beijing SinoHytec's Net Debt?

As you can see below, at the end of September 2023, Beijing SinoHytec had CN¥523.2m of debt, up from CN¥249.5m a year ago. Click the image for more detail. However, it does have CN¥1.35b in cash offsetting this, leading to net cash of CN¥827.6m.

How Healthy Is Beijing SinoHytec's Balance Sheet?

According to the last reported balance sheet, Beijing SinoHytec had liabilities of CN¥1.08b due within 12 months, and liabilities of CN¥204.9m due beyond 12 months. Offsetting this, it had CN¥1.35b in cash and CN¥1.30b in receivables that were due within 12 months. So it can boast CN¥1.36b more liquid assets than total liabilities.

This surplus suggests that Beijing SinoHytec is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Beijing SinoHytec boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing SinoHytec's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Beijing SinoHytec reported revenue of CN¥801m, which is a gain of 8.5%, 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.

So How Risky Is Beijing SinoHytec?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Beijing SinoHytec had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥618m of cash and made a loss of CN¥226m. But at least it has CN¥827.6m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 SinoHytec has 1 warning sign we think you should be aware of.

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.