Bichamp Cutting Technology (Hunan) (SZSE:002843) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Bichamp Cutting Technology (Hunan) Co., Ltd. (SZSE:002843) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Bichamp Cutting Technology (Hunan)

What Is Bichamp Cutting Technology (Hunan)'s Debt?

As you can see below, Bichamp Cutting Technology (Hunan) had CN¥415.3m of debt at September 2024, down from CN¥438.6m a year prior. But on the other hand it also has CN¥552.3m in cash, leading to a CN¥137.0m net cash position.

A Look At Bichamp Cutting Technology (Hunan)'s Liabilities

We can see from the most recent balance sheet that Bichamp Cutting Technology (Hunan) had liabilities of CN¥866.9m falling due within a year, and liabilities of CN¥313.0m due beyond that. On the other hand, it had cash of CN¥552.3m and CN¥578.6m worth of receivables due within a year. So its liabilities total CN¥49.1m more than the combination of its cash and short-term receivables.

Having regard to Bichamp Cutting Technology (Hunan)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.48b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Bichamp Cutting Technology (Hunan) also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Bichamp Cutting Technology (Hunan) if management cannot prevent a repeat of the 61% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Bichamp Cutting Technology (Hunan)'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bichamp Cutting Technology (Hunan) 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. In the last three years, Bichamp Cutting Technology (Hunan)'s free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bichamp Cutting Technology (Hunan) has CN¥137.0m in net cash. So we don't have any problem with Bichamp Cutting Technology (Hunan)'s use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Bichamp Cutting Technology (Hunan) has 2 warning signs we think 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.

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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.