Is Beijing Lier High-temperature MaterialsLtd (SZSE:002392) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Beijing Lier High-temperature Materials Co.,Ltd. (SZSE:002392) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Lier High-temperature MaterialsLtd

What Is Beijing Lier High-temperature MaterialsLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Beijing Lier High-temperature MaterialsLtd had debt of CN¥527.7m, up from CN¥48.5m in one year. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.00b.

How Strong Is Beijing Lier High-temperature MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that Beijing Lier High-temperature MaterialsLtd had liabilities of CN¥3.41b due within a year, and liabilities of CN¥313.5m falling due after that. On the other hand, it had cash of CN¥1.53b and CN¥3.97b worth of receivables due within a year. So it can boast CN¥1.78b more liquid assets than total liabilities.

This surplus strongly suggests that Beijing Lier High-temperature MaterialsLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Beijing Lier High-temperature MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Beijing Lier High-temperature MaterialsLtd has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing Lier High-temperature MaterialsLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Lier High-temperature MaterialsLtd 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. Over the last three years, Beijing Lier High-temperature MaterialsLtd reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Lier High-temperature MaterialsLtd has CN¥1.00b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 99% over the last year. So we don't think Beijing Lier High-temperature MaterialsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Beijing Lier High-temperature MaterialsLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.