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. Importantly, Bringspring Science and Technology Co., Ltd. (SZSE:300290) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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¥33.0m of debt in September 2024, down from CN¥35.1m, one year before. But on the other hand it also has CN¥146.5m in cash, leading to a CN¥113.5m 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¥540.0m due within 12 months, and liabilities of CN¥31.3m due beyond 12 months. On the other hand, it had cash of CN¥146.5m and CN¥506.0m worth of receivables due within a year. So it can boast CN¥81.2m 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¥11.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Bringspring Science and Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Bringspring Science and Technology turned things around in the last 12 months, delivering and EBIT of CN¥15m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bringspring Science and 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.

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. During the last year, Bringspring Science and Technology burned a lot of cash. 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¥113.5m 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Bringspring Science and Technology (of which 1 is a bit concerning!) you should know about.

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.

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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.