These 4 Measures Indicate That Beijing Dinghan Technology GroupLtd (SZSE:300011) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Beijing Dinghan Technology Group Co.Ltd (SZSE:300011) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Dinghan Technology GroupLtd's Net Debt?

As you can see below, Beijing Dinghan Technology GroupLtd had CN¥1.30b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥258.2m in cash, and so its net debt is CN¥1.04b.

A Look At Beijing Dinghan Technology GroupLtd's Liabilities

The latest balance sheet data shows that Beijing Dinghan Technology GroupLtd had liabilities of CN¥2.22b due within a year, and liabilities of CN¥230.2m falling due after that. Offsetting these obligations, it had cash of CN¥258.2m as well as receivables valued at CN¥2.06b due within 12 months. So its liabilities total CN¥130.9m more than the combination of its cash and short-term receivables.

Since publicly traded Beijing Dinghan Technology GroupLtd shares are worth a total of CN¥4.70b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

Check out our latest analysis for Beijing Dinghan Technology GroupLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 1.9 times and a disturbingly high net debt to EBITDA ratio of 6.3 hit our confidence in Beijing Dinghan Technology GroupLtd like a one-two punch to the gut. The debt burden here is substantial. However, the silver lining was that Beijing Dinghan Technology GroupLtd achieved a positive EBIT of CN¥74m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Dinghan Technology GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Considering the last year, Beijing Dinghan Technology GroupLtd 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.

Our View

To be frank both Beijing Dinghan Technology GroupLtd's conversion of EBIT to free cash flow and its track record of managing its debt, based on its EBITDA, make us rather uncomfortable with its debt levels. But on the bright side, its level of total liabilities is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Beijing Dinghan Technology GroupLtd's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Beijing Dinghan Technology GroupLtd (including 1 which is a bit unpleasant) .

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.