Is Beijing New Building Materials (SZSE:000786) 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.' 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 New Building Materials Public Limited Company (SZSE:000786) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing New Building Materials

How Much Debt Does Beijing New Building Materials Carry?

The image below, which you can click on for greater detail, shows that Beijing New Building Materials had debt of CN¥2.70b at the end of September 2023, a reduction from CN¥3.80b over a year. However, it does have CN¥3.77b in cash offsetting this, leading to net cash of CN¥1.07b.

A Look At Beijing New Building Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing New Building Materials had liabilities of CN¥4.98b due within 12 months and liabilities of CN¥2.27b due beyond that. Offsetting this, it had CN¥3.77b in cash and CN¥5.46b in receivables that were due within 12 months. So it can boast CN¥1.98b more liquid assets than total liabilities.

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

Fortunately, Beijing New Building Materials grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing New Building Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing New Building Materials has net cash of CN¥1.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.1b, being 67% of its EBIT. So we don't think Beijing New Building Materials's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Beijing New Building Materials that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.