We Think Beijing Beimo High-tech Frictional MaterialLtd (SZSE:002985) Has A Fair Chunk Of 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.' 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 Beimo High-tech Frictional Material Co.,Ltd (SZSE:002985) does carry debt. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Beimo High-tech Frictional MaterialLtd

What Is Beijing Beimo High-tech Frictional MaterialLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Beimo High-tech Frictional MaterialLtd had debt of CN¥308.5m, up from none in one year. However, because it has a cash reserve of CN¥206.2m, its net debt is less, at about CN¥102.3m.

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

We can see from the most recent balance sheet that Beijing Beimo High-tech Frictional MaterialLtd had liabilities of CN¥1.08b falling due within a year, and liabilities of CN¥385.5m due beyond that. Offsetting this, it had CN¥206.2m in cash and CN¥2.00b in receivables that were due within 12 months. So it actually has CN¥741.9m more liquid assets than total liabilities.

This surplus suggests that Beijing Beimo High-tech Frictional MaterialLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Beijing Beimo High-tech Frictional MaterialLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Beijing Beimo High-tech Frictional MaterialLtd had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥655m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Beijing Beimo High-tech Frictional MaterialLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥102m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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 - Beijing Beimo High-tech Frictional MaterialLtd has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.