We Think Beijing Asiacom Information Technology Co.Ltd (SZSE:301085) Is Taking Some Risk With Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Beijing Asiacom Information Technology Co,.Ltd (SZSE:301085) does carry debt. But the real question is whether this debt is making the company risky.

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Asiacom Information Technology Co.Ltd's 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 does have CN¥291.5m in cash offsetting this, leading to net debt of about CN¥46.4m.

A Look At Beijing Asiacom Information Technology Co.Ltd's Liabilities

We can see from the most recent balance sheet that Beijing Asiacom Information Technology Co.Ltd had liabilities of CN¥913.8m falling due within a year, and liabilities of CN¥40.9k due beyond that. Offsetting these obligations, it had cash of CN¥291.5m as well as receivables valued at CN¥856.1m due within 12 months. So it actually has CN¥233.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Asiacom Information Technology Co.Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Beijing Asiacom Information Technology Co.Ltd has virtually no net debt, so it's fair to say it does not have a heavy debt load!

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

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

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 decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Asiacom Information Technology Co.Ltd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding 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

Both Beijing Asiacom Information Technology Co.Ltd's EBIT growth rate and its conversion of EBIT to free cash flow were discouraging. But at least its net debt to EBITDA is a gleaming silver lining to those clouds. 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. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Beijing Asiacom Information Technology Co.Ltd .

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.