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.' 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 SinoHytec Co., Ltd. (SHSE:688339) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Beijing SinoHytec
What Is Beijing SinoHytec's Net Debt?
As you can see below, at the end of March 2024, Beijing SinoHytec had CN¥707.8m of debt, up from CN¥326.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.31b in cash, so it actually has CN¥605.5m net cash.
How Healthy Is Beijing SinoHytec's Balance Sheet?
We can see from the most recent balance sheet that Beijing SinoHytec had liabilities of CN¥1.45b falling due within a year, and liabilities of CN¥209.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥1.71b due within 12 months. So it actually has CN¥1.36b more liquid assets than total liabilities.
It's good to see that Beijing SinoHytec has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Beijing SinoHytec has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Beijing SinoHytec reported revenue of CN¥765m, which is a gain of 11%, 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 in the last year Beijing SinoHytec had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥598m of cash and made a loss of CN¥296m. But at least it has CN¥605.5m 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Beijing SinoHytec you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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About SHSE:688339
Beijing SinoHytec
Engages in the research, development, and industrialization of fuel cell engine systems in Mainland China, Canada, and South Korea.
Excellent balance sheet with limited growth.