Health Check: How Prudently Does Beijing Jingyuntong Technology (SHSE:601908) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Beijing Jingyuntong Technology Co., Ltd. (SHSE:601908) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Beijing Jingyuntong Technology

What Is Beijing Jingyuntong Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Beijing Jingyuntong Technology had CN¥7.83b of debt, an increase on CN¥7.50b, over one year. However, because it has a cash reserve of CN¥2.23b, its net debt is less, at about CN¥5.61b.

How Strong Is Beijing Jingyuntong Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Jingyuntong Technology had liabilities of CN¥8.61b falling due within a year, and liabilities of CN¥5.05b due beyond that. On the other hand, it had cash of CN¥2.23b and CN¥4.49b worth of receivables due within a year. So its liabilities total CN¥6.95b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥6.08b, we think shareholders really should watch Beijing Jingyuntong Technology's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Jingyuntong Technology 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 Jingyuntong Technology had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥9.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Beijing Jingyuntong Technology'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¥139m. Considering that alongside the liabilities mentioned above make us nervous 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¥411m 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Beijing Jingyuntong Technology 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