Is Beijing Jingxi Culture & TourismLtd (SZSE:000802) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Beijing Jingxi Culture & Tourism Co.,Ltd (SZSE:000802) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Jingxi Culture & TourismLtd

What Is Beijing Jingxi Culture & TourismLtd's Net Debt?

As you can see below, at the end of September 2024, Beijing Jingxi Culture & TourismLtd had CN¥250.0m of debt, up from CN¥200.0m a year ago. Click the image for more detail. However, it does have CN¥16.0m in cash offsetting this, leading to net debt of about CN¥234.0m.

A Look At Beijing Jingxi Culture & TourismLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Jingxi Culture & TourismLtd had liabilities of CN¥1.31b due within 12 months and liabilities of CN¥62.5m due beyond that. On the other hand, it had cash of CN¥16.0m and CN¥92.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.26b.

This deficit isn't so bad because Beijing Jingxi Culture & TourismLtd is worth CN¥5.71b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Jingxi Culture & TourismLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Jingxi Culture & TourismLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 143%, to CN¥550m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Beijing Jingxi Culture & TourismLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥136m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥34m of cash over the last year. 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. For instance, we've identified 1 warning sign for Beijing Jingxi Culture & TourismLtd that 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.