Is Beijing Tongtech (SZSE:300379) A Risky Investment?

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. We can see that Beijing Tongtech Co., Ltd. (SZSE:300379) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Beijing Tongtech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Tongtech had debt of CN¥195.7m, up from CN¥165.3m in one year. However, its balance sheet shows it holds CN¥1.74b in cash, so it actually has CN¥1.54b net cash.

How Strong Is Beijing Tongtech's Balance Sheet?

According to the last reported balance sheet, Beijing Tongtech had liabilities of CN¥444.7m due within 12 months, and liabilities of CN¥49.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.74b as well as receivables valued at CN¥591.8m due within 12 months. So it can boast CN¥1.83b more liquid assets than total liabilities.

It's good to see that Beijing Tongtech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Beijing Tongtech has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Tongtech's earnings that will influence how the balance sheet holds up in the future. 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.

See our latest analysis for Beijing Tongtech

In the last year Beijing Tongtech had a loss before interest and tax, and actually shrunk its revenue by 35%, to CN¥576m. To be frank that doesn't bode well.

So How Risky Is Beijing Tongtech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Beijing Tongtech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥218m of cash and made a loss of CN¥653m. But the saving grace is the CN¥1.54b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Tongtech (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.