Is Beijing Comens New MaterialsLtd (SZSE:300200) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Beijing Comens New Materials Co.,Ltd. (SZSE:300200) does carry debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Comens New MaterialsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beijing Comens New MaterialsLtd had CN¥217.0m of debt, an increase on none, over one year. But it also has CN¥243.5m in cash to offset that, meaning it has CN¥26.5m net cash.

A Look At Beijing Comens New MaterialsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Comens New MaterialsLtd had liabilities of CN¥599.0m due within 12 months and liabilities of CN¥15.3m due beyond that. Offsetting this, it had CN¥243.5m in cash and CN¥395.5m in receivables that were due within 12 months. So it actually has CN¥24.7m more liquid assets than total liabilities.

Having regard to Beijing Comens New MaterialsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.90b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Beijing Comens New MaterialsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Beijing Comens New MaterialsLtd

On the other hand, Beijing Comens New MaterialsLtd's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Comens New MaterialsLtd will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Comens New 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. During the last three years, Beijing Comens New MaterialsLtd produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Comens New MaterialsLtd has CN¥26.5m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Comens New MaterialsLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Beijing Comens New MaterialsLtd you should be aware of.

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.