Doushen (Beijing) Education & Technology (SZSE:300010) Has Debt But No Earnings; Should You Worry?

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 can see that Doushen (Beijing) Education & Technology INC. (SZSE:300010) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Doushen (Beijing) Education & Technology

How Much Debt Does Doushen (Beijing) Education & Technology Carry?

As you can see below, Doushen (Beijing) Education & Technology had CN¥85.8m of debt at June 2024, down from CN¥1.49b a year prior. But it also has CN¥140.0m in cash to offset that, meaning it has CN¥54.2m net cash.

How Healthy Is Doushen (Beijing) Education & Technology's Balance Sheet?

According to the last reported balance sheet, Doushen (Beijing) Education & Technology had liabilities of CN¥868.4m due within 12 months, and liabilities of CN¥88.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥140.0m as well as receivables valued at CN¥358.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥457.9m.

Since publicly traded Doushen (Beijing) Education & Technology shares are worth a total of CN¥5.68b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Doushen (Beijing) Education & Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Doushen (Beijing) Education & Technology'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, Doushen (Beijing) Education & Technology made a loss at the EBIT level, and saw its revenue drop to CN¥859m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is Doushen (Beijing) Education & Technology?

While Doushen (Beijing) Education & Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥156m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Doushen (Beijing) Education & Technology (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.