Beijing Asiacom Information Technology Co.Ltd (SZSE:301085) Takes On Some Risk With Its Use Of Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Beijing Asiacom Information Technology Co,.Ltd (SZSE:301085) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Beijing Asiacom Information Technology Co.Ltd

What Is Beijing Asiacom Information Technology Co.Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing Asiacom Information Technology Co.Ltd had CN¥337.9m of debt in September 2024, down from CN¥468.4m, one year before. However, it also had CN¥291.5m in cash, and so its net debt is CN¥46.4m.

How Strong Is Beijing Asiacom Information Technology Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Asiacom Information Technology Co.Ltd had liabilities of CN¥913.8m due within 12 months and liabilities of CN¥40.9k due beyond that. On the other hand, it had cash of CN¥291.5m and CN¥856.1m worth of receivables due within a year. So it can boast CN¥233.8m more liquid assets than total liabilities.

This surplus suggests that Beijing Asiacom Information Technology Co.Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Beijing Asiacom Information Technology Co.Ltd has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Beijing Asiacom Information Technology Co.Ltd's low debt to EBITDA ratio of 0.55 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 5.1 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Importantly, Beijing Asiacom Information Technology Co.Ltd's EBIT fell a jaw-dropping 22% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Asiacom Information Technology Co.Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Beijing Asiacom Information Technology Co.Ltd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Beijing Asiacom Information Technology Co.Ltd's conversion of EBIT to free cash flow makes us cautious about it, its track record of (not) growing its EBIT is no better. But on the brighter side of life, its net debt to EBITDA leaves us feeling more frolicsome. When we consider all the factors discussed, it seems to us that Beijing Asiacom Information Technology Co.Ltd is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Beijing Asiacom Information Technology Co.Ltd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.