Does Beijing Sanyuan Foods (SHSE:600429) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sanyuan Foods Co., Ltd. (SHSE:600429) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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 Sanyuan Foods

How Much Debt Does Beijing Sanyuan Foods Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Sanyuan Foods had debt of CN¥2.13b, up from CN¥1.78b in one year. On the flip side, it has CN¥957.3m in cash leading to net debt of about CN¥1.17b.

A Look At Beijing Sanyuan Foods' Liabilities

We can see from the most recent balance sheet that Beijing Sanyuan Foods had liabilities of CN¥2.79b falling due within a year, and liabilities of CN¥1.31b due beyond that. Offsetting this, it had CN¥957.3m in cash and CN¥873.8m in receivables that were due within 12 months. So its liabilities total CN¥2.27b more than the combination of its cash and short-term receivables.

Beijing Sanyuan Foods has a market capitalization of CN¥7.00b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Sanyuan Foods's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Beijing Sanyuan Foods made a loss at the EBIT level, and saw its revenue drop to CN¥7.1b, which is a fall of 8.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, Beijing Sanyuan Foods had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥296m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥139m and a profit of CN¥113m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 2 warning signs with Beijing Sanyuan Foods , and understanding them should be part of your investment process.

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.