Does China Beidahuang Industry Group Holdings (HKG:39) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 China Beidahuang Industry Group Holdings Limited (HKG:39) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

What Is China Beidahuang Industry Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Beidahuang Industry Group Holdings had HK$39.1m of debt in December 2024, down from HK$445.6m, one year before. However, it also had HK$18.8m in cash, and so its net debt is HK$20.2m.

A Look At China Beidahuang Industry Group Holdings' Liabilities

We can see from the most recent balance sheet that China Beidahuang Industry Group Holdings had liabilities of HK$132.2m falling due within a year, and liabilities of HK$71.9m due beyond that. Offsetting this, it had HK$18.8m in cash and HK$12.2m in receivables that were due within 12 months. So it has liabilities totalling HK$173.0m more than its cash and near-term receivables, combined.

Since publicly traded China Beidahuang Industry Group Holdings shares are worth a total of HK$894.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Beidahuang Industry Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for China Beidahuang Industry Group Holdings

In the last year China Beidahuang Industry Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$182m. That's not what we would hope to see.

Caveat Emptor

While China Beidahuang Industry Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$5.8m at the EBIT level. 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. Another cause for caution is that is bled HK$137m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 China Beidahuang Industry Group Holdings is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.

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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.