Is Beijing UniStrong Science&TechnologyLtd (SZSE:002383) Using Too Much 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 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 can see that Beijing UniStrong Science&Technology Co.,Ltd. (SZSE:002383) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing UniStrong Science&TechnologyLtd

What Is Beijing UniStrong Science&TechnologyLtd's Debt?

As you can see below, Beijing UniStrong Science&TechnologyLtd had CN¥899.8m of debt at March 2024, down from CN¥1.97b a year prior. But it also has CN¥903.5m in cash to offset that, meaning it has CN¥3.75m net cash.

A Look At Beijing UniStrong Science&TechnologyLtd's Liabilities

The latest balance sheet data shows that Beijing UniStrong Science&TechnologyLtd had liabilities of CN¥1.48b due within a year, and liabilities of CN¥293.0m falling due after that. On the other hand, it had cash of CN¥903.5m and CN¥792.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥79.6m.

This state of affairs indicates that Beijing UniStrong Science&TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.29b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Beijing UniStrong Science&TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing UniStrong Science&TechnologyLtd 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, Beijing UniStrong Science&TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 9.5%. That's not what we would hope to see.

So How Risky Is Beijing UniStrong Science&TechnologyLtd?

While Beijing UniStrong Science&TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥462m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Beijing UniStrong Science&TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.