Is Beijing QingCloud Technology Group (SHSE:688316) A Risky Investment?

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.' 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. As with many other companies Beijing QingCloud Technology Group Co., Ltd (SHSE:688316) 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. 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 QingCloud Technology Group

What Is Beijing QingCloud Technology Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing QingCloud Technology Group had debt of CN¥264.7m, up from CN¥160.2m in one year. However, it also had CN¥197.2m in cash, and so its net debt is CN¥67.5m.

A Look At Beijing QingCloud Technology Group's Liabilities

We can see from the most recent balance sheet that Beijing QingCloud Technology Group had liabilities of CN¥425.4m falling due within a year, and liabilities of CN¥33.7m due beyond that. Offsetting these obligations, it had cash of CN¥197.2m as well as receivables valued at CN¥107.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥154.3m.

Given Beijing QingCloud Technology Group has a market capitalization of CN¥4.05b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing QingCloud Technology Group 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.

Over 12 months, Beijing QingCloud Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥293m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

While Beijing QingCloud Technology Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥94m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥162m in negative free cash flow over the last twelve months. So suffice it to say we do 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. For instance, we've identified 1 warning sign for Beijing QingCloud Technology Group 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.