Is Beijing UBOX Online Technology (HKG:2429) Using Debt In A Risky Way?

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.' 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. We can see that Beijing UBOX Online Technology Corp. (HKG:2429) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing UBOX Online Technology

What Is Beijing UBOX Online Technology's Debt?

As you can see below, at the end of December 2023, Beijing UBOX Online Technology had CN¥79.1m of debt, up from CN¥70.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥347.6m in cash, so it actually has CN¥268.5m net cash.

A Look At Beijing UBOX Online Technology's Liabilities

According to the last reported balance sheet, Beijing UBOX Online Technology had liabilities of CN¥527.1m due within 12 months, and liabilities of CN¥13.6m due beyond 12 months. Offsetting this, it had CN¥347.6m in cash and CN¥34.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥158.2m more than its cash and near-term receivables, combined.

This state of affairs indicates that Beijing UBOX Online Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥10.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Beijing UBOX Online Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing UBOX Online Technology'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.

Over 12 months, Beijing UBOX Online Technology reported revenue of CN¥2.7b, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Beijing UBOX Online Technology?

Although Beijing UBOX Online Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥40m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Beijing UBOX Online Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.