Does Beijing Jingcheng Machinery Electric (HKG:187) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Jingcheng Machinery Electric Company Limited (HKG:187) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Beijing Jingcheng Machinery Electric had debt of CN¥122.2m, up from CN¥101.0m in one year. However, its balance sheet shows it holds CN¥289.8m in cash, so it actually has CN¥167.5m net cash.

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

The latest balance sheet data shows that Beijing Jingcheng Machinery Electric had liabilities of CN¥649.5m due within a year, and liabilities of CN¥457.6m falling due after that. Offsetting this, it had CN¥289.8m in cash and CN¥341.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥476.0m.

Of course, Beijing Jingcheng Machinery Electric has a market capitalization of CN¥6.27b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Beijing Jingcheng Machinery Electric reported revenue of CN¥1.4b, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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¥3.8m. 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. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Beijing Jingcheng Machinery Electric you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.