Here's Why Beijing Beida Jade Bird Universal Sci-Tech (HKG:8095) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Beijing Beida Jade Bird Universal Sci-Tech Company Limited (HKG:8095) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Beijing Beida Jade Bird Universal Sci-Tech Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Beijing Beida Jade Bird Universal Sci-Tech had CN¥995.7m of debt, an increase on CN¥886.9m, over one year. However, it also had CN¥148.5m in cash, and so its net debt is CN¥847.1m.

A Look At Beijing Beida Jade Bird Universal Sci-Tech's Liabilities

The latest balance sheet data shows that Beijing Beida Jade Bird Universal Sci-Tech had liabilities of CN¥1.04b due within a year, and liabilities of CN¥514.4m falling due after that. On the other hand, it had cash of CN¥148.5m and CN¥921.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥481.9m.

This deficit isn't so bad because Beijing Beida Jade Bird Universal Sci-Tech is worth CN¥889.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Beida Jade Bird Universal Sci-Tech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Beijing Beida Jade Bird Universal Sci-Tech

Over 12 months, Beijing Beida Jade Bird Universal Sci-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥499m, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

Not only did Beijing Beida Jade Bird Universal Sci-Tech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥118m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of CN¥136m and a profit of CN¥99m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Beijing Beida Jade Bird Universal Sci-Tech that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.