Would Beijing Beida Jade Bird Universal Sci-Tech (HKG:8095) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Beijing Beida Jade Bird Universal Sci-Tech Company Limited (HKG:8095) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, at the end of December 2021, Beijing Beida Jade Bird Universal Sci-Tech had CN¥707.8m of debt, up from CN¥420.6m a year ago. Click the image for more detail. However, it does have CN¥102.7m in cash offsetting this, leading to net debt of about CN¥605.0m.

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

Zooming in on the latest balance sheet data, we can see that Beijing Beida Jade Bird Universal Sci-Tech had liabilities of CN¥759.9m due within 12 months and liabilities of CN¥168.4m due beyond that. On the other hand, it had cash of CN¥102.7m and CN¥340.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥485.2m.

This deficit is considerable relative to its market capitalization of CN¥671.1m, so it does suggest shareholders should keep an eye on Beijing Beida Jade Bird Universal Sci-Tech's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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 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 Beida Jade Bird Universal Sci-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥395m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Beijing Beida Jade Bird Universal Sci-Tech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥27m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥8.9m and the profit of CN¥159m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Beida Jade Bird Universal Sci-Tech .

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.