Is Beijing Tricolor Technology (SHSE:603516) A Risky Investment?

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.' 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. We note that Beijing Tricolor Technology Co., Ltd (SHSE:603516) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Tricolor Technology

What Is Beijing Tricolor Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Beijing Tricolor Technology had CN¥261.5m of debt, an increase on CN¥249.0m, over one year. However, its balance sheet shows it holds CN¥738.9m in cash, so it actually has CN¥477.5m net cash.

A Look At Beijing Tricolor Technology's Liabilities

We can see from the most recent balance sheet that Beijing Tricolor Technology had liabilities of CN¥110.1m falling due within a year, and liabilities of CN¥286.0m due beyond that. On the other hand, it had cash of CN¥738.9m and CN¥186.3m worth of receivables due within a year. So it can boast CN¥529.1m more liquid assets than total liabilities.

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

Shareholders should be aware that Beijing Tricolor Technology's EBIT was down 53% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Tricolor Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beijing Tricolor 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. Over the last three years, Beijing Tricolor Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Tricolor Technology has CN¥477.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in CN¥62m. So we are not troubled with Beijing Tricolor Technology's debt use. 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 3 warning signs for Beijing Tricolor Technology you should be aware of, and 1 of them shouldn't be ignored.

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.