Is Bringspring Science and Technology (SZSE:300290) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Bringspring Science and Technology Co., Ltd. (SZSE:300290) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Bringspring Science and Technology

What Is Bringspring Science and Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bringspring Science and Technology had CN¥26.1m of debt in March 2024, down from CN¥41.3m, one year before. But it also has CN¥170.9m in cash to offset that, meaning it has CN¥144.8m net cash.

How Healthy Is Bringspring Science and Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bringspring Science and Technology had liabilities of CN¥517.9m due within 12 months and liabilities of CN¥32.5m due beyond that. Offsetting these obligations, it had cash of CN¥170.9m as well as receivables valued at CN¥469.5m due within 12 months. So it can boast CN¥90.0m 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 it's very unlikely that the CN¥5.58b company is short on cash, but still worth keeping an eye on the 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¥22m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bringspring Science and Technology has net cash of CN¥144.8m, as well as more liquid assets than liabilities. So we are not troubled with Bringspring Science and Technology's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Bringspring Science and Technology (including 1 which can't be ignored) .

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.