Here's Why Bringspring Science and Technology (SZSE:300290) Can Manage Its Debt Responsibly

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.' 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. We note that Bringspring Science and Technology Co., Ltd. (SZSE:300290) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Bringspring Science and Technology

What Is Bringspring Science and Technology's Debt?

The image below, which you can click on for greater detail, shows that Bringspring Science and Technology had debt of CN¥10.8m at the end of June 2024, a reduction from CN¥45.4m over a year. But on the other hand it also has CN¥128.2m in cash, leading to a CN¥117.4m net cash position.

A Look At Bringspring Science and Technology's Liabilities

According to the last reported balance sheet, Bringspring Science and Technology had liabilities of CN¥492.6m due within 12 months, and liabilities of CN¥32.6m due beyond 12 months. Offsetting this, it had CN¥128.2m in cash and CN¥516.7m in receivables that were due within 12 months. So it can boast CN¥119.7m more liquid assets than total liabilities.

This state of affairs indicates that Bringspring Science and Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.88b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Bringspring Science and Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Bringspring Science and Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥33m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bringspring Science and Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bringspring Science and Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Bringspring Science and Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bringspring Science and Technology has CN¥117.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Bringspring Science and Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Bringspring Science and Technology is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.