Beijing Jingcheng Machinery Electric (HKG:187) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Beijing Jingcheng Machinery Electric Company Limited (HKG:187) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Beijing Jingcheng Machinery Electric

What Is Beijing Jingcheng Machinery Electric's Debt?

The image below, which you can click on for greater detail, shows that Beijing Jingcheng Machinery Electric had debt of CN¥80.0m at the end of September 2021, a reduction from CN¥190.5m over a year. But on the other hand it also has CN¥94.1m in cash, leading to a CN¥14.1m net cash position.

A Look At Beijing Jingcheng Machinery Electric's Liabilities

According to the last reported balance sheet, Beijing Jingcheng Machinery Electric had liabilities of CN¥480.6m due within 12 months, and liabilities of CN¥51.4m due beyond 12 months. Offsetting this, it had CN¥94.1m in cash and CN¥169.1m in receivables that were due within 12 months. So its liabilities total CN¥268.9m more than the combination of its cash and short-term receivables.

Given Beijing Jingcheng Machinery Electric has a market capitalization of CN¥9.20b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Beijing Jingcheng Machinery Electric boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Jingcheng Machinery Electric'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.

In the last year Beijing Jingcheng Machinery Electric's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Beijing Jingcheng Machinery Electric?

Although Beijing Jingcheng Machinery Electric had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥185m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Jingcheng Machinery Electric (of which 1 can't be ignored!) you should know about.

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.