Does Beijing E-Hualu Information Technology (SZSE:300212) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Beijing E-Hualu Information Technology Co., Ltd. (SZSE:300212) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing E-Hualu Information Technology

What Is Beijing E-Hualu Information Technology's Debt?

As you can see below, Beijing E-Hualu Information Technology had CN¥5.46b of debt at March 2024, down from CN¥5.96b a year prior. However, it also had CN¥819.2m in cash, and so its net debt is CN¥4.64b.

How Healthy Is Beijing E-Hualu Information Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing E-Hualu Information Technology had liabilities of CN¥7.00b falling due within a year, and liabilities of CN¥2.18b due beyond that. Offsetting this, it had CN¥819.2m in cash and CN¥6.24b in receivables that were due within 12 months. So its liabilities total CN¥2.12b more than the combination of its cash and short-term receivables.

Given Beijing E-Hualu Information Technology has a market capitalization of CN¥13.6b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Beijing E-Hualu 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.

In the last year Beijing E-Hualu Information Technology had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥590m. To be frank that doesn't bode well.

Caveat Emptor

While Beijing E-Hualu Information Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.5b. 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¥489m 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 example Beijing E-Hualu Information Technology has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.