These 4 Measures Indicate That Beijing StarNeto Technology (SZSE:002829) Is Using Debt Reasonably Well

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.' 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 StarNeto Technology Co., Ltd. (SZSE:002829) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 StarNeto Technology

What Is Beijing StarNeto Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing StarNeto Technology had CN¥83.1m of debt in March 2024, down from CN¥134.5m, one year before. But on the other hand it also has CN¥400.1m in cash, leading to a CN¥317.0m net cash position.

A Look At Beijing StarNeto Technology's Liabilities

According to the last reported balance sheet, Beijing StarNeto Technology had liabilities of CN¥592.6m due within 12 months, and liabilities of CN¥55.3m due beyond 12 months. On the other hand, it had cash of CN¥400.1m and CN¥856.5m worth of receivables due within a year. So it can boast CN¥608.7m more liquid assets than total liabilities.

This surplus suggests that Beijing StarNeto Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing StarNeto Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Beijing StarNeto Technology if management cannot prevent a repeat of the 94% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beijing StarNeto Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Beijing StarNeto Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Beijing StarNeto Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing StarNeto Technology has net cash of CN¥317.0m, as well as more liquid assets than liabilities. So we are not troubled with Beijing StarNeto Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Beijing StarNeto Technology has 3 warning signs (and 1 which is concerning) we think you should know about.

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.

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