We Think Beijing Asiacom Information Technology Co.Ltd (SZSE:301085) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Beijing Asiacom Information Technology Co,.Ltd (SZSE:301085) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Beijing Asiacom Information Technology Co.Ltd Carry?

As you can see below, at the end of March 2024, Beijing Asiacom Information Technology Co.Ltd had CN¥404.4m of debt, up from CN¥314.3m a year ago. Click the image for more detail. However, it does have CN¥296.7m in cash offsetting this, leading to net debt of about CN¥107.6m.

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

The latest balance sheet data shows that Beijing Asiacom Information Technology Co.Ltd had liabilities of CN¥891.6m due within a year, and liabilities of CN¥306.3k falling due after that. Offsetting this, it had CN¥296.7m in cash and CN¥880.9m in receivables that were due within 12 months. So it actually has CN¥285.7m 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Beijing Asiacom Information Technology Co.Ltd has net debt of just 0.96 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.3 times the interest expense over the last year. Also positive, Beijing Asiacom Information Technology Co.Ltd grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Asiacom Information Technology Co.Ltd will need earnings to service that debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Beijing Asiacom Information Technology Co.Ltd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Beijing Asiacom Information Technology Co.Ltd's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Beijing Asiacom Information Technology Co.Ltd can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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 Asiacom Information Technology Co.Ltd has 4 warning signs (and 3 which are potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com