Is Beingmate (SZSE:002570) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Beingmate Co., Ltd. (SZSE:002570) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Beingmate

What Is Beingmate's Debt?

You can click the graphic below for the historical numbers, but it shows that Beingmate had CN¥887.6m of debt in September 2024, down from CN¥928.4m, one year before. But on the other hand it also has CN¥967.8m in cash, leading to a CN¥80.2m net cash position.

How Strong Is Beingmate's Balance Sheet?

We can see from the most recent balance sheet that Beingmate had liabilities of CN¥2.01b falling due within a year, and liabilities of CN¥42.7m due beyond that. Offsetting this, it had CN¥967.8m in cash and CN¥406.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥677.0m more than its cash and near-term receivables, combined.

Given Beingmate has a market capitalization of CN¥4.50b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Beingmate boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Beingmate made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥103m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Beingmate'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Beingmate may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Beingmate actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Beingmate does have more liabilities than liquid assets, it also has net cash of CN¥80.2m. The cherry on top was that in converted 366% of that EBIT to free cash flow, bringing in CN¥377m. So we are not troubled with Beingmate's debt use. 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. For example, we've discovered 2 warning signs for Beingmate that you should be aware of before investing here.

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.

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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.