Does Beijing Water Business Doctor (SZSE:300055) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Beijing Water Business Doctor Co., Ltd. (SZSE:300055) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Water Business Doctor

What Is Beijing Water Business Doctor's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Water Business Doctor had debt of CN¥429.0m, up from CN¥318.0m in one year. However, it does have CN¥621.5m in cash offsetting this, leading to net cash of CN¥192.6m.

How Healthy Is Beijing Water Business Doctor's Balance Sheet?

The latest balance sheet data shows that Beijing Water Business Doctor had liabilities of CN¥2.16b due within a year, and liabilities of CN¥302.8m falling due after that. Offsetting these obligations, it had cash of CN¥621.5m as well as receivables valued at CN¥851.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥987.9m.

Beijing Water Business Doctor has a market capitalization of CN¥4.47b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Beijing Water Business Doctor boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Water Business Doctor'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.

In the last year Beijing Water Business Doctor had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥2.4b. To be frank that doesn't bode well.

So How Risky Is Beijing Water Business Doctor?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Beijing Water Business Doctor had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥643m of cash and made a loss of CN¥229m. Given it only has net cash of CN¥192.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - Beijing Water Business Doctor has 1 warning sign we think you should be aware of.

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.