Is Beijing BDStar Navigation (SZSE:002151) Using Debt In A Risky Way?

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.' 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. As with many other companies Beijing BDStar Navigation Co., Ltd. (SZSE:002151) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing BDStar Navigation

How Much Debt Does Beijing BDStar Navigation Carry?

The image below, which you can click on for greater detail, shows that Beijing BDStar Navigation had debt of CN¥56.5m at the end of September 2024, a reduction from CN¥455.5m over a year. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥1.64b.

A Look At Beijing BDStar Navigation's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing BDStar Navigation had liabilities of CN¥631.8m due within 12 months and liabilities of CN¥158.4m due beyond that. Offsetting this, it had CN¥1.70b in cash and CN¥902.5m in receivables that were due within 12 months. So it can boast CN¥1.81b more liquid assets than total liabilities.

This surplus suggests that Beijing BDStar Navigation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing BDStar Navigation has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing BDStar Navigation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing BDStar Navigation had a loss before interest and tax, and actually shrunk its revenue by 55%, to CN¥2.0b. That makes us nervous, to say the least.

So How Risky Is Beijing BDStar Navigation?

Although Beijing BDStar Navigation had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥73m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 1 warning sign for Beijing BDStar Navigation you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.