Health Check: How Prudently Does Beijing LeiKe Defense Technology (SZSE:002413) Use Debt?

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.' 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. Importantly, Beijing LeiKe Defense Technology Co., Ltd. (SZSE:002413) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing LeiKe Defense Technology

How Much Debt Does Beijing LeiKe Defense Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing LeiKe Defense Technology had CN¥181.6m of debt in September 2024, down from CN¥321.7m, one year before. But on the other hand it also has CN¥386.6m in cash, leading to a CN¥205.0m net cash position.

A Look At Beijing LeiKe Defense Technology's Liabilities

The latest balance sheet data shows that Beijing LeiKe Defense Technology had liabilities of CN¥1.13b due within a year, and liabilities of CN¥139.3m falling due after that. Offsetting this, it had CN¥386.6m in cash and CN¥1.35b in receivables that were due within 12 months. So it actually has CN¥469.0m more liquid assets than total liabilities.

This surplus suggests that Beijing LeiKe Defense Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 it is future earnings, more than anything, that will determine Beijing LeiKe Defense Technology'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.

Over 12 months, Beijing LeiKe Defense Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Beijing LeiKe Defense Technology?

While Beijing LeiKe Defense Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥181m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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.

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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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.