These 4 Measures Indicate That Beijing eGOVA Co (SZSE:300075) Is Using Debt Reasonably Well

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. We can see that Beijing eGOVA Co,. Ltd (SZSE:300075) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Beijing eGOVA Co

What Is Beijing eGOVA Co's Debt?

As you can see below, at the end of March 2024, Beijing eGOVA Co had CN¥120.9m of debt, up from CN¥100.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.79b in cash, leading to a CN¥1.67b net cash position.

A Look At Beijing eGOVA Co's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing eGOVA Co had liabilities of CN¥669.3m due within 12 months and liabilities of CN¥135.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥1.89b due within 12 months. So it actually has CN¥2.87b more liquid assets than total liabilities.

This excess liquidity is a great indication that Beijing eGOVA Co's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Beijing eGOVA Co boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Beijing eGOVA Co's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing eGOVA Co can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beijing eGOVA Co has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Beijing eGOVA Co recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing eGOVA Co has CN¥1.67b in net cash and a decent-looking balance sheet. So we are not troubled with Beijing eGOVA Co's debt use. 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 1 warning sign for Beijing eGOVA Co you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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