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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Beijing Easpring Material Technology CO.,LTD. (SZSE:300073) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for Beijing Easpring Material TechnologyLTD

What Is Beijing Easpring Material TechnologyLTD's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Beijing Easpring Material TechnologyLTD had debt of CN¥59.3m, up from CN¥30.4m in one year. However, it does have CN¥6.69b in cash offsetting this, leading to net cash of CN¥6.63b.

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¥2.51b due within 12 months and liabilities of CN¥528.7m due beyond that. Offsetting this, it had CN¥6.69b in cash and CN¥3.65b in receivables that were due within 12 months. So it can boast CN¥7.30b 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Beijing Easpring Material TechnologyLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Beijing Easpring Material TechnologyLTD's load is not too heavy, because its EBIT was down 52% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Easpring Material TechnologyLTD 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Beijing Easpring Material TechnologyLTD created free cash flow amounting to 10% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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¥6.63b, as well as more liquid assets than liabilities. So we are not troubled with Beijing Easpring Material TechnologyLTD's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Beijing Easpring Material TechnologyLTD (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.