Would Beijing Si-Tech Information Technology (SZSE:300608) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Beijing Si-Tech Information Technology Co., Ltd. (SZSE:300608) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Si-Tech Information Technology

What Is Beijing Si-Tech Information Technology's Net Debt?

As you can see below, at the end of September 2024, Beijing Si-Tech Information Technology had CN¥757.0m of debt, up from CN¥675.8m a year ago. Click the image for more detail. However, it does have CN¥541.8m in cash offsetting this, leading to net debt of about CN¥215.2m.

How Healthy Is Beijing Si-Tech Information Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Si-Tech Information Technology had liabilities of CN¥718.0m due within 12 months and liabilities of CN¥257.8m due beyond that. Offsetting these obligations, it had cash of CN¥541.8m as well as receivables valued at CN¥525.8m due within 12 months. So it can boast CN¥91.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Si-Tech Information 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 it is Beijing Si-Tech Information Technology'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.

In the last year Beijing Si-Tech Information Technology's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Beijing Si-Tech Information Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥40m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. Case in point: We've spotted 2 warning signs for Beijing Si-Tech Information Technology you should be aware of.

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.