Shijiazhuang ChangShan BeiMing TechnologyLtd (SZSE:000158) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shijiazhuang ChangShan BeiMing TechnologyLtd

What Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Net Debt?

As you can see below, Shijiazhuang ChangShan BeiMing TechnologyLtd had CN¥5.41b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.22b in cash offsetting this, leading to net debt of about CN¥4.19b.

How Strong Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Shijiazhuang ChangShan BeiMing TechnologyLtd had liabilities of CN¥9.53b due within a year, and liabilities of CN¥1.53b falling due after that. Offsetting this, it had CN¥1.22b in cash and CN¥3.53b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.31b more than its cash and near-term receivables, combined.

Since publicly traded Shijiazhuang ChangShan BeiMing TechnologyLtd shares are worth a total of CN¥43.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shijiazhuang ChangShan BeiMing TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shijiazhuang ChangShan BeiMing TechnologyLtd reported revenue of CN¥9.3b, which is a gain of 9.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shijiazhuang ChangShan BeiMing TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥239m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥250m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shijiazhuang ChangShan BeiMing TechnologyLtd is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.