Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Beijing Jingcheng Machinery Electric Company Limited (HKG:187) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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¥108.0m at the end of June 2021, a reduction from CN¥297.6m over a year. However, its balance sheet shows it holds CN¥109.9m in cash, so it actually has CN¥1.90m net cash.
How Healthy Is Beijing Jingcheng Machinery Electric's Balance Sheet?
According to the last reported balance sheet, Beijing Jingcheng Machinery Electric had liabilities of CN¥531.5m due within 12 months, and liabilities of CN¥52.7m due beyond 12 months. On the other hand, it had cash of CN¥109.9m and CN¥218.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥256.0m.
Of course, Beijing Jingcheng Machinery Electric has a market capitalization of CN¥2.62b, 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Beijing Jingcheng Machinery Electric had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to CN¥1.1b. We would much 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¥179m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Beijing Jingcheng Machinery Electric you should be aware of.
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.
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.
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