Here's Why Beijing Shengtong Printing (SZSE:002599) Can Manage Its Debt Responsibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Beijing Shengtong Printing Co., Ltd (SZSE:002599) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Shengtong Printing

What Is Beijing Shengtong Printing's Net Debt?

The chart below, which you can click on for greater detail, shows that Beijing Shengtong Printing had CN¥99.3m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥141.4m in cash, leading to a CN¥42.1m net cash position.

A Look At Beijing Shengtong Printing's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Shengtong Printing had liabilities of CN¥862.1m due within 12 months and liabilities of CN¥54.5m due beyond that. Offsetting this, it had CN¥141.4m in cash and CN¥541.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥233.7m.

Since publicly traded Beijing Shengtong Printing shares are worth a total of CN¥4.29b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Beijing Shengtong Printing boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Beijing Shengtong Printing made a loss at the EBIT level, last year, it was also good to see that it generated CN¥32m in EBIT over the last twelve months. 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 Shengtong Printing 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Shengtong Printing has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Beijing Shengtong Printing 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.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Beijing Shengtong Printing has CN¥42.1m in net cash. So we don't have any problem with Beijing Shengtong Printing's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Shengtong Printing (of which 1 can't be ignored!) you should know about.

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.