Health Check: How Prudently Does Beijing Jingcheng Machinery Electric (HKG:187) Use 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 Beijing Jingcheng Machinery Electric had debt of CN¥131.7m at the end of September 2023, a reduction from CN¥182.7m over a year. But it also has CN¥432.0m in cash to offset that, meaning it has CN¥300.3m net cash.

A Look At Beijing Jingcheng Machinery Electric's Liabilities

The latest balance sheet data shows that Beijing Jingcheng Machinery Electric had liabilities of CN¥733.6m due within a year, and liabilities of CN¥598.2m falling due after that. Offsetting this, it had CN¥432.0m in cash and CN¥410.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥489.5m more than its cash and near-term receivables, combined.

Of course, Beijing Jingcheng Machinery Electric has a market capitalization of CN¥5.88b, so these liabilities are probably manageable. 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Jingcheng Machinery Electric'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, Beijing Jingcheng Machinery Electric saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Beijing Jingcheng Machinery Electric?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Beijing Jingcheng Machinery Electric had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥46m and booked a CN¥52m accounting loss. But the saving grace is the CN¥300.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Beijing Jingcheng Machinery Electric I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.