These 4 Measures Indicate That Beijing Andawell Science & Technology (SZSE:300719) Is Using Debt Reasonably Well

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.' 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 Andawell Science & Technology Co., Ltd. (SZSE:300719) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Beijing Andawell Science & Technology

What Is Beijing Andawell Science & Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Andawell Science & Technology had debt of CN¥296.1m, up from CN¥176.1m in one year. However, because it has a cash reserve of CN¥134.0m, its net debt is less, at about CN¥162.0m.

How Strong Is Beijing Andawell Science & Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Andawell Science & Technology had liabilities of CN¥545.4m falling due within a year, and liabilities of CN¥29.4m due beyond that. Offsetting this, it had CN¥134.0m in cash and CN¥865.4m in receivables that were due within 12 months. So it actually has CN¥424.7m more liquid assets than total liabilities.

This surplus suggests that Beijing Andawell Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Beijing Andawell Science & Technology has a low net debt to EBITDA ratio of only 1.4. And its EBIT easily covers its interest expense, being 25.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Although Beijing Andawell Science & Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥109m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Andawell Science & 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Beijing Andawell Science & Technology saw substantial negative free cash flow, in total. 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.

Our View

Beijing Andawell Science & Technology's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Beijing Andawell Science & Technology is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. To that end, you should learn about the 3 warning signs we've spotted with Beijing Andawell Science & Technology (including 1 which is a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.