Beijing Dahao TechnologyLtd (SHSE:603025) Has A Rock Solid Balance Sheet

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 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. As with many other companies Beijing Dahao Technology Corp.,Ltd (SHSE:603025) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Beijing Dahao TechnologyLtd

What Is Beijing Dahao TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Dahao TechnologyLtd had debt of CN¥736.7m, up from CN¥307.9m in one year. But it also has CN¥1.46b in cash to offset that, meaning it has CN¥720.5m net cash.

A Look At Beijing Dahao TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Beijing Dahao TechnologyLtd had liabilities of CN¥1.58b falling due within a year, and liabilities of CN¥281.6m due beyond that. Offsetting this, it had CN¥1.46b in cash and CN¥1.18b in receivables that were due within 12 months. So it actually has CN¥778.6m more liquid assets than total liabilities.

This surplus suggests that Beijing Dahao TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Beijing Dahao TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Beijing Dahao TechnologyLtd has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Dahao TechnologyLtd 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 company can only pay off debt with cold hard cash, not accounting profits. Beijing Dahao TechnologyLtd 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. Over the most recent three years, Beijing Dahao TechnologyLtd recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Dahao TechnologyLtd has net cash of CN¥720.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 43% year-on-year EBIT growth. So is Beijing Dahao TechnologyLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Beijing Dahao TechnologyLtd 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.