Is BeijingWest Industries International (HKG:2339) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies BeijingWest Industries International Limited (HKG:2339) makes use of debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BeijingWest Industries International

What Is BeijingWest Industries International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that BeijingWest Industries International had HK$60.6m of debt in June 2022, down from HK$70.6m, one year before. But on the other hand it also has HK$150.5m in cash, leading to a HK$89.9m net cash position.

A Look At BeijingWest Industries International's Liabilities

According to the last reported balance sheet, BeijingWest Industries International had liabilities of HK$645.1m due within 12 months, and liabilities of HK$444.0m due beyond 12 months. On the other hand, it had cash of HK$150.5m and HK$343.6m worth of receivables due within a year. So its liabilities total HK$595.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$384.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, BeijingWest Industries International would probably need a major re-capitalization if its creditors were to demand repayment. Given that BeijingWest Industries International has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is BeijingWest Industries International'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.

Over 12 months, BeijingWest Industries International made a loss at the EBIT level, and saw its revenue drop to HK$2.6b, which is a fall of 2.8%. That's not what we would hope to see.

So How Risky Is BeijingWest Industries International?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that BeijingWest Industries International had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$121m of cash and made a loss of HK$10m. Given it only has net cash of HK$89.9m, 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. 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. Case in point: We've spotted 3 warning signs for BeijingWest Industries International you should be aware of, and 1 of them is significant.

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.