Is Beijing Yuanliu Hongyuan Electronic Technology (SHSE:603267) 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.' 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. We can see that Beijing Yuanliu Hongyuan Electronic Technology Co., Ltd. (SHSE:603267) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 Yuanliu Hongyuan Electronic Technology

How Much Debt Does Beijing Yuanliu Hongyuan Electronic Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing Yuanliu Hongyuan Electronic Technology had CN¥405.4m of debt in March 2024, down from CN¥586.9m, one year before. But it also has CN¥1.40b in cash to offset that, meaning it has CN¥995.0m net cash.

How Healthy Is Beijing Yuanliu Hongyuan Electronic Technology's Balance Sheet?

According to the last reported balance sheet, Beijing Yuanliu Hongyuan Electronic Technology had liabilities of CN¥873.2m due within 12 months, and liabilities of CN¥85.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.40b as well as receivables valued at CN¥1.94b due within 12 months. So it actually has CN¥2.39b more liquid assets than total liabilities.

This luscious liquidity implies that Beijing Yuanliu Hongyuan Electronic Technology's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Beijing Yuanliu Hongyuan Electronic Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Beijing Yuanliu Hongyuan Electronic Technology's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Beijing Yuanliu Hongyuan Electronic Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Beijing Yuanliu Hongyuan Electronic Technology 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 Yuanliu Hongyuan Electronic Technology recorded free cash flow of 49% 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 Yuanliu Hongyuan Electronic Technology has CN¥995.0m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Yuanliu Hongyuan Electronic Technology's debt use. 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 - Beijing Yuanliu Hongyuan Electronic Technology has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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