We Think Beijing Kawin Technology Share-Holding (SHSE:688687) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Beijing Kawin Technology Share-Holding Co., Ltd. (SHSE:688687) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Kawin Technology Share-Holding

How Much Debt Does Beijing Kawin Technology Share-Holding Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Kawin Technology Share-Holding had debt of CN¥107.2m, up from CN¥10.7m in one year. But it also has CN¥1.18b in cash to offset that, meaning it has CN¥1.08b net cash.

How Strong Is Beijing Kawin Technology Share-Holding's Balance Sheet?

According to the last reported balance sheet, Beijing Kawin Technology Share-Holding had liabilities of CN¥500.9m due within 12 months, and liabilities of CN¥113.0m due beyond 12 months. On the other hand, it had cash of CN¥1.18b and CN¥404.5m worth of receivables due within a year. So it can boast CN¥973.7m more liquid assets than total liabilities.

This surplus suggests that Beijing Kawin Technology Share-Holding is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Beijing Kawin Technology Share-Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Beijing Kawin Technology Share-Holding grew its EBIT by 340% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Kawin Technology Share-Holding 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. Beijing Kawin Technology Share-Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Beijing Kawin Technology Share-Holding recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Kawin Technology Share-Holding has CN¥1.08b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 340% over the last year. So we don't think Beijing Kawin Technology Share-Holding's use of debt is 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. To that end, you should be aware of the 2 warning signs we've spotted with Beijing Kawin Technology Share-Holding .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.