Health Check: How Prudently Does BlueFocus Intelligent Communications Group (SZSE:300058) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that BlueFocus Intelligent Communications Group Co., Ltd. (SZSE:300058) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BlueFocus Intelligent Communications Group

What Is BlueFocus Intelligent Communications Group's Net Debt?

As you can see below, BlueFocus Intelligent Communications Group had CN¥2.21b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥3.87b in cash, so it actually has CN¥1.66b net cash.

How Strong Is BlueFocus Intelligent Communications Group's Balance Sheet?

We can see from the most recent balance sheet that BlueFocus Intelligent Communications Group had liabilities of CN¥12.5b falling due within a year, and liabilities of CN¥784.0m due beyond that. Offsetting this, it had CN¥3.87b in cash and CN¥10.9b in receivables that were due within 12 months. So it can boast CN¥1.52b more liquid assets than total liabilities.

This surplus suggests that BlueFocus Intelligent Communications Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BlueFocus Intelligent Communications Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BlueFocus Intelligent Communications Group 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.

Over 12 months, BlueFocus Intelligent Communications Group reported revenue of CN¥62b, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is BlueFocus Intelligent Communications Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BlueFocus Intelligent Communications Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥145m and booked a CN¥48m accounting loss. But the saving grace is the CN¥1.66b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, BlueFocus Intelligent Communications Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for BlueFocus Intelligent Communications Group that you should be aware of.

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.