Would Shandong New Beiyang Information Technology (SZSE:002376) Be Better Off With Less Debt?

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. As with many other companies Shandong New Beiyang Information Technology Co., Ltd. (SZSE:002376) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shandong New Beiyang Information Technology

What Is Shandong New Beiyang Information Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shandong New Beiyang Information Technology had CN¥1.38b of debt, an increase on CN¥1.27b, over one year. However, it also had CN¥644.9m in cash, and so its net debt is CN¥737.3m.

How Strong Is Shandong New Beiyang Information Technology's Balance Sheet?

According to the last reported balance sheet, Shandong New Beiyang Information Technology had liabilities of CN¥1.27b due within 12 months, and liabilities of CN¥913.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥644.9m as well as receivables valued at CN¥739.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥803.0m.

Since publicly traded Shandong New Beiyang Information Technology shares are worth a total of CN¥4.71b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Shandong New Beiyang Information Technology 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.

In the last year Shandong New Beiyang Information Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 6.3%, to CN¥2.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shandong New Beiyang Information Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥355k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥136m and the profit of CN¥65m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shandong New Beiyang Information Technology (of which 1 doesn't sit too well with us!) you should know about.

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.