Is Beijing Watertek Information Technology (SZSE:300324) Using Debt Sensibly?

Warren Buffett famously said, '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 can see that Beijing Watertek Information Technology Co., Ltd. (SZSE:300324) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beijing Watertek Information Technology

What Is Beijing Watertek Information Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing Watertek Information Technology had CN¥282.1m of debt in December 2023, down from CN¥330.6m, one year before. But it also has CN¥1.37b in cash to offset that, meaning it has CN¥1.09b net cash.

A Look At Beijing Watertek Information Technology's Liabilities

The latest balance sheet data shows that Beijing Watertek Information Technology had liabilities of CN¥2.23b due within a year, and liabilities of CN¥306.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.37b as well as receivables valued at CN¥1.86b due within 12 months. So it actually has CN¥692.8m more liquid assets than total liabilities.

It's good to see that Beijing Watertek Information Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 22%, to CN¥3.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Beijing Watertek Information Technology?

Statistically speaking companies that lose money are riskier than those that make money. 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. Indeed, in that time it burnt through CN¥52m of cash and made a loss of CN¥268m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.09b. That kitty means the company can keep spending for growth for at least two years, at current rates. Beijing Watertek Information Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Watertek Information Technology (of which 1 can't be ignored!) you should know about.

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.