Beijing Jingcheng Machinery Electric (HKG:187) Is Carrying A Fair Bit Of Debt

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. Importantly, Beijing Jingcheng Machinery Electric Company Limited (HKG:187) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Jingcheng Machinery Electric

What Is Beijing Jingcheng Machinery Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing Jingcheng Machinery Electric had CN¥101.0m of debt in March 2022, down from CN¥168.0m, one year before. However, it also had CN¥88.1m in cash, and so its net debt is CN¥12.8m.

How Healthy Is Beijing Jingcheng Machinery Electric's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Jingcheng Machinery Electric had liabilities of CN¥528.0m due within 12 months and liabilities of CN¥93.5m due beyond that. On the other hand, it had cash of CN¥88.1m and CN¥216.9m worth of receivables due within a year. So its liabilities total CN¥316.5m more than the combination of its cash and short-term receivables.

Of course, Beijing Jingcheng Machinery Electric has a market capitalization of CN¥8.70b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Beijing Jingcheng Machinery Electric has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Jingcheng Machinery Electric will need earnings to service that debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to CN¥1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Beijing Jingcheng Machinery Electric produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥58m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥101m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. 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 is potentially serious!) you should know about.

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.