Is Beijing Electronic Zone High-tech Group (SHSE:600658) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Beijing Electronic Zone High-tech Group Co., Ltd. (SHSE:600658) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Electronic Zone High-tech Group

What Is Beijing Electronic Zone High-tech Group's Net Debt?

As you can see below, at the end of September 2024, Beijing Electronic Zone High-tech Group had CN¥7.47b of debt, up from CN¥6.78b a year ago. Click the image for more detail. However, it also had CN¥1.34b in cash, and so its net debt is CN¥6.12b.

How Healthy Is Beijing Electronic Zone High-tech Group's Balance Sheet?

According to the last reported balance sheet, Beijing Electronic Zone High-tech Group had liabilities of CN¥5.12b due within 12 months, and liabilities of CN¥6.27b due beyond 12 months. On the other hand, it had cash of CN¥1.34b and CN¥1.17b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.88b.

The deficiency here weighs heavily on the CN¥5.92b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Beijing Electronic Zone High-tech Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Electronic Zone High-tech Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Beijing Electronic Zone High-tech Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 68%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Beijing Electronic Zone High-tech Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥24m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥276m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Be aware that Beijing Electronic Zone High-tech Group is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.