Health Check: How Prudently Does Beijing Shiji Information Technology (SZSE:002153) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Beijing Shiji Information Technology Co., Ltd. (SZSE:002153) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Shiji Information Technology

How Much Debt Does Beijing Shiji Information Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Beijing Shiji Information Technology had debt of CN¥19.9m, up from CN¥748.4k in one year. But it also has CN¥4.51b in cash to offset that, meaning it has CN¥4.49b net cash.

How Healthy Is Beijing Shiji Information Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Shiji Information Technology had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥61.2m due beyond that. Offsetting these obligations, it had cash of CN¥4.51b as well as receivables valued at CN¥591.7m due within 12 months. So it actually has CN¥3.70b more liquid assets than total liabilities.

This surplus suggests that Beijing Shiji Information Technology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Beijing Shiji Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Shiji Information Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Beijing Shiji Information Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.5b, which is a fall of 12%. We would much prefer see growth.

So How Risky Is Beijing Shiji Information Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Beijing Shiji Information Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥473m of cash and made a loss of CN¥776m. But the saving grace is the CN¥4.49b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Beijing Shiji Information Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.