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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Shandong New Beiyang Information Technology

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

The image below, which you can click on for greater detail, shows that Shandong New Beiyang Information Technology had debt of CN¥1.31b at the end of June 2024, a reduction from CN¥1.48b over a year. However, because it has a cash reserve of CN¥589.5m, its net debt is less, at about CN¥716.8m.

A Look At Shandong New Beiyang Information Technology's Liabilities

The latest balance sheet data shows that Shandong New Beiyang Information Technology had liabilities of CN¥1.23b due within a year, and liabilities of CN¥904.5m falling due after that. Offsetting this, it had CN¥589.5m in cash and CN¥735.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥812.0m more than its cash and near-term receivables, combined.

Shandong New Beiyang Information Technology has a market capitalization of CN¥4.00b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, Shandong New Beiyang Information Technology reported revenue of CN¥2.3b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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¥39m. 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¥312m and the profit of CN¥26m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shandong New Beiyang Information Technology is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

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.