Is Beijing Roborock Technology (SHSE:688169) A Risky Investment?

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. Importantly, Beijing Roborock Technology Co., Ltd. (SHSE:688169) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Roborock Technology

What Is Beijing Roborock Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beijing Roborock Technology had CN¥500.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥7.28b in cash, so it actually has CN¥6.78b net cash.

A Look At Beijing Roborock Technology's Liabilities

The latest balance sheet data shows that Beijing Roborock Technology had liabilities of CN¥4.29b due within a year, and liabilities of CN¥136.2m falling due after that. On the other hand, it had cash of CN¥7.28b and CN¥1.20b worth of receivables due within a year. So it can boast CN¥4.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Roborock Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Roborock Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Beijing Roborock Technology grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing Roborock Technology 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beijing Roborock Technology 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. During the last three years, Beijing Roborock Technology produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Roborock Technology has CN¥6.78b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in CN¥1.3b. So is Beijing Roborock Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Beijing Roborock Technology's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.