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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing SinoHytec

How Much Debt Does Beijing SinoHytec Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing SinoHytec had debt of CN¥849.5m, up from CN¥494.4m in one year. But it also has CN¥1.29b in cash to offset that, meaning it has CN¥442.0m net cash.

How Strong Is Beijing SinoHytec's Balance Sheet?

We can see from the most recent balance sheet that Beijing SinoHytec had liabilities of CN¥1.64b falling due within a year, and liabilities of CN¥242.1m due beyond that. Offsetting this, it had CN¥1.29b in cash and CN¥1.81b in receivables that were due within 12 months. So it can boast CN¥1.22b more liquid assets than total liabilities.

This excess liquidity suggests that Beijing SinoHytec is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing SinoHytec can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Beijing SinoHytec wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to CN¥824m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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¥408m of cash and made a loss of CN¥308m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥442.0m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Beijing SinoHytec may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Beijing SinoHytec that you should be aware of before investing here.

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.