Is Beijing E-Hualu Information Technology (SZSE:300212) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Beijing E-Hualu Information Technology Co., Ltd. (SZSE:300212) makes use of debt. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing E-Hualu Information Technology

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

The image below, which you can click on for greater detail, shows that Beijing E-Hualu Information Technology had debt of CN¥5.68b at the end of September 2024, a reduction from CN¥6.30b over a year. On the flip side, it has CN¥575.0m in cash leading to net debt of about CN¥5.11b.

A Look At Beijing E-Hualu Information Technology's Liabilities

The latest balance sheet data shows that Beijing E-Hualu Information Technology had liabilities of CN¥6.98b due within a year, and liabilities of CN¥2.07b falling due after that. On the other hand, it had cash of CN¥575.0m and CN¥5.92b worth of receivables due within a year. So its liabilities total CN¥2.56b more than the combination of its cash and short-term receivables.

Of course, Beijing E-Hualu Information Technology has a market capitalization of CN¥17.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing E-Hualu Information Technology will need earnings to service that debt. 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, Beijing E-Hualu Information Technology made a loss at the EBIT level, and saw its revenue drop to CN¥494m, which is a fall of 50%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Beijing E-Hualu Information Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥1.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥296m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for Beijing E-Hualu Information Technology you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.