Beijing Relpow Technology (SZSE:300593) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Beijing Relpow Technology Co., Ltd (SZSE:300593) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Relpow Technology

What Is Beijing Relpow Technology's Net Debt?

As you can see below, at the end of December 2023, Beijing Relpow Technology had CN¥816.5m of debt, up from CN¥645.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.07b in cash, leading to a CN¥254.0m net cash position.

A Look At Beijing Relpow Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Relpow Technology had liabilities of CN¥1.08b due within 12 months and liabilities of CN¥302.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.07b as well as receivables valued at CN¥1.19b due within 12 months. So it actually has CN¥872.6m more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Relpow Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beijing Relpow Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Beijing Relpow Technology's load is not too heavy, because its EBIT was down 54% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Relpow Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Beijing Relpow Technology 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. During the last three years, Beijing Relpow Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Relpow Technology has CN¥254.0m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Relpow Technology'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 instance, we've identified 4 warning signs for Beijing Relpow 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.

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

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.