Is Beijing Oriental Jicheng (SZSE:002819) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Beijing Oriental Jicheng Co., Ltd. (SZSE:002819) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Beijing Oriental Jicheng

How Much Debt Does Beijing Oriental Jicheng Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Oriental Jicheng had debt of CN¥88.1m, up from CN¥75.1m in one year. But on the other hand it also has CN¥1.35b in cash, leading to a CN¥1.26b net cash position.

How Healthy Is Beijing Oriental Jicheng's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Oriental Jicheng had liabilities of CN¥1.32b due within 12 months and liabilities of CN¥57.6m due beyond that. On the other hand, it had cash of CN¥1.35b and CN¥1.68b worth of receivables due within a year. So it actually has CN¥1.66b more liquid assets than total liabilities.

This surplus suggests that Beijing Oriental Jicheng is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Beijing Oriental Jicheng boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Oriental Jicheng's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Oriental Jicheng had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥2.8b. We would much prefer see growth.

So How Risky Is Beijing Oriental Jicheng?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Beijing Oriental Jicheng lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥71m of cash and made a loss of CN¥61m. Given it only has net cash of CN¥1.26b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Oriental Jicheng'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.

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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.