Beijing LeiKe Defense Technology (SZSE:002413) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Beijing LeiKe Defense Technology Co., Ltd. (SZSE:002413) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing LeiKe Defense Technology

How Much Debt Does Beijing LeiKe Defense Technology Carry?

The image below, which you can click on for greater detail, shows that Beijing LeiKe Defense Technology had debt of CN¥321.7m at the end of September 2023, a reduction from CN¥437.8m over a year. But on the other hand it also has CN¥349.2m in cash, leading to a CN¥27.5m net cash position.

How Strong Is Beijing LeiKe Defense Technology's Balance Sheet?

According to the last reported balance sheet, Beijing LeiKe Defense Technology had liabilities of CN¥1.24b due within 12 months, and liabilities of CN¥156.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥349.2m as well as receivables valued at CN¥1.53b due within 12 months. So it can boast CN¥487.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing LeiKe Defense Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing LeiKe Defense Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing LeiKe Defense Technology 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 LeiKe Defense Technology had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥1.2b. That makes us nervous, to say the least.

So How Risky Is Beijing LeiKe Defense Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Beijing LeiKe Defense Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥108m of cash and made a loss of CN¥820m. But the saving grace is the CN¥27.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Beijing LeiKe Defense Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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.