Here's Why Beijing Easpring Material TechnologyLTD (SZSE:300073) Can Manage Its Debt Responsibly

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.' 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 Easpring Material Technology CO.,LTD. (SZSE:300073) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Easpring Material TechnologyLTD

What Is Beijing Easpring Material TechnologyLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beijing Easpring Material TechnologyLTD had CN¥59.3m of debt, an increase on none, over one year. But on the other hand it also has CN¥7.27b in cash, leading to a CN¥7.21b net cash position.

A Look At Beijing Easpring Material TechnologyLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Easpring Material TechnologyLTD had liabilities of CN¥2.56b due within 12 months and liabilities of CN¥667.8m due beyond that. Offsetting this, it had CN¥7.27b in cash and CN¥3.21b in receivables that were due within 12 months. So it can boast CN¥7.25b more liquid assets than total liabilities.

This luscious liquidity implies that Beijing Easpring Material TechnologyLTD's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Beijing Easpring Material TechnologyLTD 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 Easpring Material TechnologyLTD if management cannot prevent a repeat of the 72% 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Easpring Material TechnologyLTD'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Beijing Easpring Material TechnologyLTD 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. Over the last three years, Beijing Easpring Material TechnologyLTD reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Easpring Material TechnologyLTD has CN¥7.21b in net cash and a decent-looking balance sheet. So we don't have any problem with Beijing Easpring Material TechnologyLTD's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Easpring Material TechnologyLTD (of which 1 is a bit unpleasant!) you should know about.

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.