Is Beijing Oriental Jicheng (SZSE:002819) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Beijing Oriental Jicheng Co., Ltd. (SZSE:002819) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Beijing Oriental Jicheng

What Is Beijing Oriental Jicheng's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Beijing Oriental Jicheng had debt of CN¥75.1m, up from CN¥51.2m in one year. However, its balance sheet shows it holds CN¥1.18b in cash, so it actually has CN¥1.11b net cash.

How Healthy Is Beijing Oriental Jicheng's Balance Sheet?

According to the last reported balance sheet, Beijing Oriental Jicheng had liabilities of CN¥1.16b due within 12 months, and liabilities of CN¥85.7m due beyond 12 months. On the other hand, it had cash of CN¥1.18b and CN¥1.85b worth of receivables due within a year. So it can boast CN¥1.78b more liquid assets than total liabilities.

It's good to see that Beijing Oriental Jicheng has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Beijing Oriental Jicheng 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 you can't view debt in total isolation; since Beijing Oriental Jicheng 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 Beijing Oriental Jicheng wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to CN¥3.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Beijing Oriental Jicheng?

Although Beijing Oriental Jicheng had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥799m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 33% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Beijing Oriental Jicheng .

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.