Would Beijing Global Safety Technology (SZSE:300523) Be Better Off With Less 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.' 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. As with many other companies Beijing Global Safety Technology Co., Ltd. (SZSE:300523) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. 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 Beijing Global Safety Technology

What Is Beijing Global Safety Technology's Net Debt?

As you can see below, at the end of June 2024, Beijing Global Safety Technology had CN¥809.8m of debt, up from CN¥575.8m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥681.9m, its net debt is less, at about CN¥127.8m.

How Healthy Is Beijing Global Safety Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Global Safety Technology had liabilities of CN¥2.37b due within 12 months and liabilities of CN¥70.2m due beyond that. Offsetting these obligations, it had cash of CN¥681.9m as well as receivables valued at CN¥2.25b due within 12 months. So it can boast CN¥493.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Global Safety Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing Global Safety 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.

Over 12 months, Beijing Global Safety Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

While Beijing Global Safety Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥28m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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 Beijing Global Safety Technology is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.