Is Beijing Highlander Digital Technology (SZSE:300065) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Beijing Highlander Digital Technology Co., Ltd. (SZSE:300065) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beijing Highlander Digital Technology

What Is Beijing Highlander Digital Technology's Debt?

The image below, which you can click on for greater detail, shows that Beijing Highlander Digital Technology had debt of CN¥119.0m at the end of September 2024, a reduction from CN¥133.1m over a year. However, it does have CN¥937.6m in cash offsetting this, leading to net cash of CN¥818.6m.

How Healthy Is Beijing Highlander Digital Technology's Balance Sheet?

According to the last reported balance sheet, Beijing Highlander Digital Technology had liabilities of CN¥523.5m due within 12 months, and liabilities of CN¥55.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥937.6m as well as receivables valued at CN¥430.9m due within 12 months. So it can boast CN¥790.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Highlander Digital Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Highlander Digital Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Highlander Digital Technology'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.

Over 12 months, Beijing Highlander Digital Technology made a loss at the EBIT level, and saw its revenue drop to CN¥519m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Beijing Highlander Digital Technology?

While Beijing Highlander Digital Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥83m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 example, we've discovered 2 warning signs for Beijing Highlander Digital Technology (1 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.