Does Beijing Dahao TechnologyLtd (SHSE:603025) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Beijing Dahao Technology Corp.,Ltd (SHSE:603025) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Dahao TechnologyLtd

What Is Beijing Dahao TechnologyLtd's Debt?

As you can see below, at the end of September 2024, Beijing Dahao TechnologyLtd had CN¥748.5m of debt, up from CN¥681.6m a year ago. Click the image for more detail. But it also has CN¥1.23b in cash to offset that, meaning it has CN¥480.7m 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¥1.42b falling due within a year, and liabilities of CN¥296.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥1.26b due within 12 months. So it actually has CN¥778.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Dahao TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Dahao TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Beijing Dahao TechnologyLtd has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Dahao TechnologyLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Beijing Dahao TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Beijing Dahao TechnologyLtd recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Dahao TechnologyLtd has CN¥480.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 58% over the last year. So we don't think Beijing Dahao TechnologyLtd's use of debt is risky. 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. For example, we've discovered 1 warning sign for Beijing Dahao TechnologyLtd that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.