Does Beijing Watertek Information Technology (SZSE:300324) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Beijing Watertek Information Technology Co., Ltd. (SZSE:300324) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Watertek Information Technology

What Is Beijing Watertek Information Technology's Debt?

As you can see below, Beijing Watertek Information Technology had CN¥198.5m of debt at September 2024, down from CN¥263.2m a year prior. However, it does have CN¥990.6m in cash offsetting this, leading to net cash of CN¥792.1m.

How Strong Is Beijing Watertek Information Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Watertek Information Technology had liabilities of CN¥2.12b due within 12 months and liabilities of CN¥256.8m due beyond that. Offsetting these obligations, it had cash of CN¥990.6m as well as receivables valued at CN¥1.70b due within 12 months. So it actually has CN¥310.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Watertek Information Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Watertek Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Watertek Information Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Beijing Watertek Information Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 3.0%, to CN¥2.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Beijing Watertek Information Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Beijing Watertek Information Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥392m and booked a CN¥279m accounting loss. But at least it has CN¥792.1m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 2 warning signs for Beijing Watertek Information Technology that you should be aware of.

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.