Is Beijing Relpow Technology (SZSE:300593) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Beijing Relpow Technology Co., Ltd (SZSE:300593) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Relpow Technology

What Is Beijing Relpow Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Relpow Technology had debt of CN¥877.0m, up from CN¥661.2m in one year. But on the other hand it also has CN¥1.02b in cash, leading to a CN¥142.6m net cash position.

A Look At Beijing Relpow Technology's Liabilities

The latest balance sheet data shows that Beijing Relpow Technology had liabilities of CN¥1.02b due within a year, and liabilities of CN¥349.6m falling due after that. Offsetting this, it had CN¥1.02b in cash and CN¥1.12b in receivables that were due within 12 months. So it can boast CN¥768.3m more liquid assets than total liabilities.

This surplus suggests that Beijing Relpow Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Relpow Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Beijing Relpow Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Beijing Relpow Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is Beijing Relpow Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Beijing Relpow Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥168m and booked a CN¥56m accounting loss. Given it only has net cash of CN¥142.6m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beijing Relpow Technology is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.