We Think Beijing Beimo High-tech Frictional MaterialLtd (SZSE:002985) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Beijing Beimo High-tech Frictional Material Co.,Ltd (SZSE:002985) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Beimo High-tech Frictional MaterialLtd

How Much Debt Does Beijing Beimo High-tech Frictional MaterialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Beijing Beimo High-tech Frictional MaterialLtd had CN¥300.0m of debt, an increase on none, over one year. However, it does have CN¥346.0m in cash offsetting this, leading to net cash of CN¥46.0m.

How Strong Is Beijing Beimo High-tech Frictional MaterialLtd's Balance Sheet?

The latest balance sheet data shows that Beijing Beimo High-tech Frictional MaterialLtd had liabilities of CN¥1.05b due within a year, and liabilities of CN¥387.3m falling due after that. On the other hand, it had cash of CN¥346.0m and CN¥2.04b worth of receivables due within a year. So it can boast CN¥948.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Beimo High-tech Frictional MaterialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beijing Beimo High-tech Frictional MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Beijing Beimo High-tech Frictional MaterialLtd if management cannot prevent a repeat of the 65% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Beimo High-tech Frictional MaterialLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Beimo High-tech Frictional MaterialLtd 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. Considering the last three years, Beijing Beimo High-tech Frictional MaterialLtd actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Beimo High-tech Frictional MaterialLtd has net cash of CN¥46.0m, as well as more liquid assets than liabilities. So we are not troubled with Beijing Beimo High-tech Frictional MaterialLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beijing Beimo High-tech Frictional MaterialLtd is showing 2 warning signs in our investment analysis , you should know about...

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.

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