Beijing Strong BiotechnologiesInc (SZSE:300406) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Beijing Strong Biotechnologies,Inc. (SZSE:300406) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Strong BiotechnologiesInc

What Is Beijing Strong BiotechnologiesInc's Net Debt?

The chart below, which you can click on for greater detail, shows that Beijing Strong BiotechnologiesInc had CN¥1.17b in debt in September 2024; about the same as the year before. However, it does have CN¥994.6m in cash offsetting this, leading to net debt of about CN¥171.2m.

A Look At Beijing Strong BiotechnologiesInc's Liabilities

The latest balance sheet data shows that Beijing Strong BiotechnologiesInc had liabilities of CN¥287.6m due within a year, and liabilities of CN¥1.21b falling due after that. On the other hand, it had cash of CN¥994.6m and CN¥1.18b worth of receivables due within a year. So it can boast CN¥680.4m more liquid assets than total liabilities.

This surplus suggests that Beijing Strong BiotechnologiesInc has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Beijing Strong BiotechnologiesInc has a low net debt to EBITDA ratio of only 0.25. And its EBIT easily covers its interest expense, being 28.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Beijing Strong BiotechnologiesInc has increased its EBIT by 7.1% over twelve months, which should ease any concerns about debt repayment. 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 Strong BiotechnologiesInc 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Beijing Strong BiotechnologiesInc produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Beijing Strong BiotechnologiesInc's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Considering this range of factors, it seems to us that Beijing Strong BiotechnologiesInc is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. 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. For example, we've discovered 1 warning sign for Beijing Strong BiotechnologiesInc that you should be aware of before investing here.

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.