Is Beijing Strong BiotechnologiesInc (SZSE:300406) A Risky Investment?

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. We note that Beijing Strong Biotechnologies,Inc. (SZSE:300406) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Beijing Strong BiotechnologiesInc

What Is Beijing Strong BiotechnologiesInc's Debt?

As you can see below, at the end of March 2024, Beijing Strong BiotechnologiesInc had CN¥1.16b of debt, up from CN¥1.12b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.03b, its net debt is less, at about CN¥130.1m.

How Healthy Is Beijing Strong BiotechnologiesInc's Balance Sheet?

According to the last reported balance sheet, Beijing Strong BiotechnologiesInc had liabilities of CN¥247.6m due within 12 months, and liabilities of CN¥1.19b due beyond 12 months. Offsetting this, it had CN¥1.03b in cash and CN¥1.17b in receivables that were due within 12 months. So it can boast CN¥771.6m 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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's net debt is only 0.19 times its EBITDA. And its EBIT covers its interest expense a whopping 29.6 times over. So we're pretty relaxed about its super-conservative use of debt. Also positive, Beijing Strong BiotechnologiesInc grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing Strong BiotechnologiesInc can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Beijing Strong BiotechnologiesInc produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 the good news does not stop there, as its net debt to EBITDA also supports that impression! 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 the balance sheet looks pretty healthy, to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing Strong BiotechnologiesInc has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com