Is Beijing Dahao TechnologyLtd (SHSE:603025) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Beijing Dahao TechnologyLtd

How Much Debt Does Beijing Dahao TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Dahao TechnologyLtd had debt of CN¥748.5m, up from CN¥681.6m in one year. However, its balance sheet shows it holds CN¥1.23b in cash, so it actually has CN¥480.7m net cash.

How Healthy Is Beijing Dahao TechnologyLtd's Balance Sheet?

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. On the other hand, it had cash of CN¥1.23b and CN¥1.26b worth of receivables due within a year. So it actually has CN¥778.7m 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. 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.

On top of that, Beijing Dahao TechnologyLtd grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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 weak cash conversion makes it more difficult to handle indebtedness.

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 we liked the look of last year's 58% year-on-year EBIT growth. So we don't think Beijing Dahao TechnologyLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beijing Dahao TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.