Beijing Advanced Digital Technology (SZSE:300541) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Advanced Digital Technology Co., Ltd (SZSE:300541) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Advanced Digital Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beijing Advanced Digital Technology had CN¥332.8m of debt, an increase on CN¥175.6m, over one year. However, it also had CN¥309.5m in cash, and so its net debt is CN¥23.3m.

How Strong Is Beijing Advanced Digital Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Advanced Digital Technology had liabilities of CN¥880.3m due within 12 months and liabilities of CN¥4.73m due beyond that. Offsetting this, it had CN¥309.5m in cash and CN¥743.8m in receivables that were due within 12 months. So it can boast CN¥168.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Advanced Digital Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Beijing Advanced Digital Technology has a very light debt load indeed.

See our latest analysis for Beijing Advanced Digital Technology

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Beijing Advanced Digital Technology has a low net debt to EBITDA ratio of only 0.20. And its EBIT easily covers its interest expense, being 14.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Beijing Advanced Digital Technology's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Advanced Digital 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Beijing Advanced Digital Technology recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Beijing Advanced Digital Technology's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. Considering this range of data points, we think Beijing Advanced Digital Technology is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. For instance, we've identified 3 warning signs for Beijing Advanced Digital Technology (1 is concerning) you should be aware of.

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.