Does Bichamp Cutting Technology (Hunan) (SZSE:002843) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Bichamp Cutting Technology (Hunan) Co., Ltd. (SZSE:002843) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

Check out our latest analysis for Bichamp Cutting Technology (Hunan)

How Much Debt Does Bichamp Cutting Technology (Hunan) Carry?

As you can see below, Bichamp Cutting Technology (Hunan) had CN¥342.2m of debt at December 2023, down from CN¥365.9m a year prior. However, it does have CN¥712.5m in cash offsetting this, leading to net cash of CN¥370.3m.

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¥939.6m falling due within a year, and liabilities of CN¥254.4m due beyond that. On the other hand, it had cash of CN¥712.5m and CN¥612.8m worth of receivables due within a year. So it actually has CN¥131.4m more liquid assets than total liabilities.

This surplus suggests that Bichamp Cutting Technology (Hunan) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Bichamp Cutting Technology (Hunan) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Bichamp Cutting Technology (Hunan)'s EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, Bichamp Cutting Technology (Hunan) produced sturdy free cash flow equating to 74% 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 it is always sensible to investigate a company's debt, in this case Bichamp Cutting Technology (Hunan) has CN¥370.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥34m, being 74% of its EBIT. So we don't have any problem with Bichamp Cutting Technology (Hunan)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bichamp Cutting Technology (Hunan) is showing 3 warning signs in our investment analysis , you should know about...

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.