These 4 Measures Indicate That Beijing Sanlian Hope Shin-Gosen Technical Service (SZSE:300384) Is Using Debt Safely

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.' 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. As with many other companies Beijing Sanlian Hope Shin-Gosen Technical Service Co., Ltd. (SZSE:300384) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Sanlian Hope Shin-Gosen Technical Service

What Is Beijing Sanlian Hope Shin-Gosen Technical Service's Debt?

The image below, which you can click on for greater detail, shows that Beijing Sanlian Hope Shin-Gosen Technical Service had debt of CN¥57.0m at the end of September 2024, a reduction from CN¥60.1m over a year. However, its balance sheet shows it holds CN¥2.07b in cash, so it actually has CN¥2.02b net cash.

A Look At Beijing Sanlian Hope Shin-Gosen Technical Service's Liabilities

The latest balance sheet data shows that Beijing Sanlian Hope Shin-Gosen Technical Service had liabilities of CN¥892.3m due within a year, and liabilities of CN¥123.5m falling due after that. Offsetting these obligations, it had cash of CN¥2.07b as well as receivables valued at CN¥176.3m due within 12 months. So it can boast CN¥1.24b more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Sanlian Hope Shin-Gosen Technical Service is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Beijing Sanlian Hope Shin-Gosen Technical Service has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Beijing Sanlian Hope Shin-Gosen Technical Service grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Sanlian Hope Shin-Gosen Technical Service can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Sanlian Hope Shin-Gosen Technical Service 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 three years, Beijing Sanlian Hope Shin-Gosen Technical Service recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Sanlian Hope Shin-Gosen Technical Service has net cash of CN¥2.02b, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in CN¥260m. So is Beijing Sanlian Hope Shin-Gosen Technical Service's debt a risk? It doesn't seem so to us. 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 example - Beijing Sanlian Hope Shin-Gosen Technical Service has 1 warning sign we think 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.