Is Beijing Dabeinong Technology GroupLtd (SZSE:002385) Weighed On By Its Debt Load?

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 Dabeinong Technology Group Co.,Ltd. (SZSE:002385) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, 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.

Check out our latest analysis for Beijing Dabeinong Technology GroupLtd

How Much Debt Does Beijing Dabeinong Technology GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Dabeinong Technology GroupLtd had debt of CN¥12.9b, up from CN¥11.4b in one year. However, it also had CN¥3.06b in cash, and so its net debt is CN¥9.87b.

How Strong Is Beijing Dabeinong Technology GroupLtd's Balance Sheet?

The latest balance sheet data shows that Beijing Dabeinong Technology GroupLtd had liabilities of CN¥15.4b due within a year, and liabilities of CN¥4.22b falling due after that. Offsetting this, it had CN¥3.06b in cash and CN¥2.25b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥14.3b.

This deficit is considerable relative to its market capitalization of CN¥16.8b, so it does suggest shareholders should keep an eye on Beijing Dabeinong Technology GroupLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Dabeinong Technology GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Beijing Dabeinong Technology GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to CN¥32b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Beijing Dabeinong Technology GroupLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥732m. 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. Another cause for caution is that is bled CN¥518m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Dabeinong Technology GroupLtd .

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.

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