Beijing Capital Development (SHSE:600376) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Beijing Capital Development Co., Ltd. (SHSE:600376) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Capital Development

How Much Debt Does Beijing Capital Development Carry?

The image below, which you can click on for greater detail, shows that Beijing Capital Development had debt of CN¥111.7b at the end of June 2024, a reduction from CN¥118.1b over a year. However, because it has a cash reserve of CN¥14.4b, its net debt is less, at about CN¥97.2b.

A Look At Beijing Capital Development's Liabilities

We can see from the most recent balance sheet that Beijing Capital Development had liabilities of CN¥73.7b falling due within a year, and liabilities of CN¥107.5b due beyond that. Offsetting these obligations, it had cash of CN¥14.4b as well as receivables valued at CN¥51.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥115.2b.

This deficit casts a shadow over the CN¥6.96b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Beijing Capital Development would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Capital Development will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Capital Development had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥37b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Beijing Capital Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.1b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated CN¥2.7b of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Beijing Capital Development that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.