Is Beijing Zhidemai Technology (SZSE:300785) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Zhidemai Technology

What Is Beijing Zhidemai Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beijing Zhidemai Technology had CN¥146.2m of debt, an increase on CN¥115.6m, over one year. However, its balance sheet shows it holds CN¥770.6m in cash, so it actually has CN¥624.3m net cash.

How Strong Is Beijing Zhidemai Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Zhidemai Technology had liabilities of CN¥288.7m falling due within a year, and liabilities of CN¥148.0m due beyond that. Offsetting these obligations, it had cash of CN¥770.6m as well as receivables valued at CN¥552.5m due within 12 months. So it actually has CN¥886.3m more liquid assets than total liabilities.

This surplus suggests that Beijing Zhidemai Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Zhidemai Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Beijing Zhidemai Technology's saving grace is its low debt levels, because its EBIT has tanked 38% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Zhidemai Technology can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Zhidemai Technology has CN¥624.3m in net cash and a decent-looking balance sheet. So while Beijing Zhidemai Technology does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing Zhidemai Technology has 1 warning sign we think you should be aware of.

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.