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 should shareholders be worried about its use of debt?

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. 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. 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.

See our latest analysis for Beijing Oriental Jicheng

What Is Beijing Oriental Jicheng's Debt?

As you can see below, at the end of September 2024, Beijing Oriental Jicheng had CN¥88.1m of debt, up from CN¥75.1m a year ago. Click the image for more detail. However, it does have CN¥1.35b in cash offsetting this, leading to net cash of CN¥1.26b.

A Look At Beijing Oriental Jicheng's Liabilities

According to the last reported balance sheet, Beijing Oriental Jicheng had liabilities of CN¥1.32b due within 12 months, and liabilities of CN¥57.6m due beyond 12 months. On the other hand, it had cash of CN¥1.35b and CN¥1.68b worth of receivables due within a year. So it can boast 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. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Beijing Oriental Jicheng lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥71m and booked a CN¥61m accounting loss. 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. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Beijing Oriental Jicheng I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.