Is Beijing Jingcheng Machinery Electric (HKG:187) Using Debt In A Risky Way?

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.' 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. We note that Beijing Jingcheng Machinery Electric Company Limited (HKG:187) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its 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¥168.0m at the end of March 2021, a reduction from CN¥284.7m over a year. But it also has CN¥238.1m in cash to offset that, meaning it has CN¥70.1m net cash.

A Look At Beijing Jingcheng Machinery Electric's Liabilities

We can see from the most recent balance sheet that Beijing Jingcheng Machinery Electric had liabilities of CN¥607.4m falling due within a year, and liabilities of CN¥52.0m due beyond that. Offsetting this, it had CN¥238.1m in cash and CN¥185.2m in receivables that were due within 12 months. So its liabilities total CN¥236.1m more than the combination of its cash and short-term receivables.

Given Beijing Jingcheng Machinery Electric has a market capitalization of CN¥2.36b, it's hard to believe these liabilities pose much threat. 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 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 hardly impresses, its not too bad either.

So How Risky Is Beijing Jingcheng Machinery Electric?

While Beijing Jingcheng Machinery Electric lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥178m. So taking that on face value, and considering the cash, we don't think its very risky in the near 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Beijing Jingcheng Machinery Electric is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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