These 4 Measures Indicate That Beijing Easpring Material TechnologyLTD (SZSE:300073) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Beijing Easpring Material Technology CO.,LTD. (SZSE:300073) 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Beijing Easpring Material TechnologyLTD

What Is Beijing Easpring Material TechnologyLTD's Net Debt?

As you can see below, at the end of March 2024, Beijing Easpring Material TechnologyLTD had CN¥59.2m of debt, up from CN¥29.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥6.46b in cash, leading to a CN¥6.40b net cash position.

How Healthy Is Beijing Easpring Material TechnologyLTD's Balance Sheet?

According to the last reported balance sheet, Beijing Easpring Material TechnologyLTD had liabilities of CN¥2.56b due within 12 months, and liabilities of CN¥555.4m due beyond 12 months. Offsetting this, it had CN¥6.46b in cash and CN¥4.09b in receivables that were due within 12 months. So it can boast CN¥7.44b more liquid assets than total liabilities.

This surplus liquidity suggests that Beijing Easpring Material TechnologyLTD's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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!

It is just as well that Beijing Easpring Material TechnologyLTD's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Easpring Material TechnologyLTD 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Beijing Easpring Material TechnologyLTD may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Beijing Easpring Material TechnologyLTD basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Easpring Material TechnologyLTD has net cash of CN¥6.40b, as well as more liquid assets than liabilities. So we don't have any problem with Beijing Easpring Material TechnologyLTD's use of debt. 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. We've identified 3 warning signs with Beijing Easpring Material TechnologyLTD (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.