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

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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¥193.5m of debt at March 2024, down from CN¥282.7m a year prior. But it also has CN¥1.02b in cash to offset that, meaning it has CN¥830.7m net cash.

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

We can see from the most recent balance sheet that Beijing Watertek Information Technology had liabilities of CN¥1.98b falling due within a year, and liabilities of CN¥287.4m due beyond that. Offsetting this, it had CN¥1.02b in cash and CN¥1.79b in receivables that were due within 12 months. So it can boast CN¥547.8m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Watertek Information Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Watertek Information Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥2.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Beijing Watertek Information Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Beijing Watertek Information Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥133m and booked a CN¥272m accounting loss. But the saving grace is the CN¥830.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. Case in point: We've spotted 2 warning signs for Beijing Watertek Information Technology you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com