These 4 Measures Indicate That Beijing Highlander Digital Technology (SZSE:300065) 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.' 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 Highlander Digital Technology Co., Ltd. (SZSE:300065) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 Highlander Digital Technology

What Is Beijing Highlander Digital Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Beijing Highlander Digital Technology had CN¥177.8m of debt, an increase on CN¥88.8m, over one year. But on the other hand it also has CN¥964.8m in cash, leading to a CN¥787.0m net cash position.

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

Zooming in on the latest balance sheet data, we can see that Beijing Highlander Digital Technology had liabilities of CN¥599.3m due within 12 months and liabilities of CN¥21.7m due beyond that. Offsetting this, it had CN¥964.8m in cash and CN¥427.9m in receivables that were due within 12 months. So it actually has CN¥771.6m more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Highlander Digital Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. 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.

Notably, Beijing Highlander Digital Technology made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥5.5m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Highlander Digital Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beijing Highlander Digital Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Beijing Highlander Digital Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Highlander Digital Technology has CN¥787.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Beijing Highlander Digital Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Beijing Highlander Digital Technology is showing 2 warning signs in our investment analysis , and 1 of those is significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.