Beijing Zhidemai Technology (SZSE:300785) Has A Pretty Healthy Balance Sheet

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. Importantly, Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Beijing Zhidemai Technology

What Is Beijing Zhidemai Technology's Debt?

As you can see below, Beijing Zhidemai Technology had CN¥87.9m of debt at June 2024, down from CN¥115.6m a year prior. However, its balance sheet shows it holds CN¥742.0m in cash, so it actually has CN¥654.1m net cash.

A Look At Beijing Zhidemai Technology's Liabilities

According to the last reported balance sheet, Beijing Zhidemai Technology had liabilities of CN¥284.4m due within 12 months, and liabilities of CN¥117.1m due beyond 12 months. Offsetting this, it had CN¥742.0m in cash and CN¥598.8m in receivables that were due within 12 months. So it actually has CN¥939.2m more liquid assets than total liabilities.

It's good to see that Beijing Zhidemai Technology 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. Succinctly put, Beijing Zhidemai Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Beijing Zhidemai Technology's load is not too heavy, because its EBIT was down 61% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Zhidemai Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Zhidemai Technology 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. Over the last three years, Beijing Zhidemai Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Zhidemai Technology has CN¥654.1m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Zhidemai Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Beijing Zhidemai Technology you should be aware of, and 1 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.