Does Beijing Baination PicturesLtd (SZSE:300291) Have A Healthy Balance Sheet?

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.' 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 Baination Pictures Co.,Ltd. (SZSE:300291) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Beijing Baination PicturesLtd

What Is Beijing Baination PicturesLtd's Debt?

As you can see below, at the end of June 2024, Beijing Baination PicturesLtd had CN¥45.3m of debt, up from CN¥21.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.01b in cash, so it actually has CN¥966.3m net cash.

How Strong Is Beijing Baination PicturesLtd's Balance Sheet?

According to the last reported balance sheet, Beijing Baination PicturesLtd had liabilities of CN¥685.2m due within 12 months, and liabilities of CN¥60.6m due beyond 12 months. Offsetting this, it had CN¥1.01b in cash and CN¥694.8m in receivables that were due within 12 months. So it can boast CN¥960.5m more liquid assets than total liabilities.

It's good to see that Beijing Baination PicturesLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Beijing Baination PicturesLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Baination PicturesLtd 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.

Over 12 months, Beijing Baination PicturesLtd reported revenue of CN¥571m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Beijing Baination PicturesLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Beijing Baination PicturesLtd 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¥390m and booked a CN¥179m accounting loss. But at least it has CN¥966.3m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Beijing Baination PicturesLtd may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Beijing Baination PicturesLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.