Is Beijing Lier High-temperature MaterialsLtd (SZSE:002392) Using Too Much 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.' 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 note that Beijing Lier High-temperature Materials Co.,Ltd. (SZSE:002392) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Beijing Lier High-temperature MaterialsLtd had CN¥299.9m of debt, an increase on CN¥56.7m, over one year. However, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥727.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Beijing Lier High-temperature MaterialsLtd had liabilities of CN¥3.28b due within 12 months and liabilities of CN¥64.7m due beyond that. Offsetting this, it had CN¥1.03b in cash and CN¥4.20b in receivables that were due within 12 months. So it can boast CN¥1.88b more liquid assets than total liabilities.

This excess liquidity is a great indication that Beijing Lier High-temperature MaterialsLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Beijing Lier High-temperature MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Beijing Lier High-temperature MaterialsLtd grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Beijing Lier High-temperature MaterialsLtd 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. Over the last three years, Beijing Lier High-temperature MaterialsLtd reported free cash flow worth 4.1% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Lier High-temperature MaterialsLtd has CN¥727.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 63% 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. We've identified 1 warning sign with Beijing Lier High-temperature MaterialsLtd , and understanding them should be part of your investment process.

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.