We Think Beijing UniStrong Science&TechnologyLtd (SZSE:002383) Has A Fair Chunk Of 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 Beijing UniStrong Science&Technology Co.,Ltd. (SZSE:002383) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing UniStrong Science&TechnologyLtd

What Is Beijing UniStrong Science&TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing UniStrong Science&TechnologyLtd had CN¥405.5m of debt in September 2024, down from CN¥1.01b, one year before. However, it also had CN¥380.0m in cash, and so its net debt is CN¥25.5m.

A Look At Beijing UniStrong Science&TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing UniStrong Science&TechnologyLtd had liabilities of CN¥981.2m due within 12 months and liabilities of CN¥236.3m due beyond that. Offsetting this, it had CN¥380.0m in cash and CN¥799.8m in receivables that were due within 12 months. So its liabilities total CN¥37.6m more than the combination of its cash and short-term receivables.

Having regard to Beijing UniStrong Science&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¥6.26b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Beijing UniStrong Science&TechnologyLtd has a very light debt load indeed. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Beijing UniStrong Science&TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Beijing UniStrong Science&TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥223m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥1.2m and the profit of CN¥417m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For instance, we've identified 1 warning sign for Beijing UniStrong Science&TechnologyLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.