Does Beijing New Building Materials (SZSE:000786) Have A Healthy Balance Sheet?

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.' 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. We can see that Beijing New Building Materials Public Limited Company (SZSE:000786) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing New Building Materials

What Is Beijing New Building Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing New Building Materials had CN¥2.58b of debt in September 2024, down from CN¥2.70b, one year before. But it also has CN¥3.41b in cash to offset that, meaning it has CN¥835.8m net cash.

How Strong Is Beijing New Building Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing New Building Materials had liabilities of CN¥8.99b due within 12 months and liabilities of CN¥1.17b due beyond that. Offsetting these obligations, it had cash of CN¥3.41b as well as receivables valued at CN¥7.16b due within 12 months. So it can boast CN¥410.2m more liquid assets than total liabilities.

Having regard to Beijing New Building Materials' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥51.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Beijing New Building Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Beijing New Building Materials has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 New Building Materials'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing New Building Materials 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. During the last three years, Beijing New Building Materials generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing New Building Materials has CN¥835.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥4.3b. So we don't think Beijing New Building Materials's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Beijing New Building Materials , and understanding them should be part of your investment process.

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.