Does Beijing Bayi Space LCD TechnologyLtd (SHSE:688181) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Beijing Bayi Space LCD Technology Co.,Ltd. (SHSE:688181) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Beijing Bayi Space LCD TechnologyLtd's Net Debt?

As you can see below, at the end of September 2024, Beijing Bayi Space LCD TechnologyLtd had CN¥218.5m of debt, up from CN¥183.8m a year ago. Click the image for more detail. However, it does have CN¥524.3m in cash offsetting this, leading to net cash of CN¥305.8m.

How Strong Is Beijing Bayi Space LCD TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Beijing Bayi Space LCD TechnologyLtd had liabilities of CN¥549.3m falling due within a year, and liabilities of CN¥111.1m due beyond that. Offsetting these obligations, it had cash of CN¥524.3m as well as receivables valued at CN¥174.5m due within 12 months. So it can boast CN¥38.4m more liquid assets than total liabilities.

Having regard to Beijing Bayi Space LCD TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥3.68b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Beijing Bayi Space LCD TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Beijing Bayi Space LCD TechnologyLtd

But the other side of the story is that Beijing Bayi Space LCD TechnologyLtd saw its EBIT decline by 8.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Bayi Space LCD TechnologyLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Beijing Bayi Space LCD 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 last three years, Beijing Bayi Space LCD TechnologyLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Bayi Space LCD TechnologyLtd has net cash of CN¥305.8m, as well as more liquid assets than liabilities. So we don't have any problem with Beijing Bayi Space LCD TechnologyLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Beijing Bayi Space LCD TechnologyLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.