Beijing eGOVA Co (SZSE:300075) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Beijing eGOVA Co,. Ltd (SZSE:300075) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Beijing eGOVA Co's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing eGOVA Co had CN¥101.4m of debt in September 2024, down from CN¥120.3m, one year before. However, it does have CN¥1.56b in cash offsetting this, leading to net cash of CN¥1.46b.

A Look At Beijing eGOVA Co's Liabilities

The latest balance sheet data shows that Beijing eGOVA Co had liabilities of CN¥661.1m due within a year, and liabilities of CN¥142.2m falling due after that. On the other hand, it had cash of CN¥1.56b and CN¥1.92b worth of receivables due within a year. So it actually has CN¥2.67b more liquid assets than total liabilities.

This excess liquidity suggests that Beijing eGOVA Co is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Beijing eGOVA Co has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing eGOVA Co can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

See our latest analysis for Beijing eGOVA Co

Over 12 months, Beijing eGOVA Co made a loss at the EBIT level, and saw its revenue drop to CN¥847m, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is Beijing eGOVA Co?

While Beijing eGOVA Co lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥61m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Beijing eGOVA Co , 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.