Is BYD Electronic (International) (HKG:285) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies BYD Electronic (International) Company Limited (HKG:285) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BYD Electronic (International)

How Much Debt Does BYD Electronic (International) Carry?

The image below, which you can click on for greater detail, shows that at June 2023 BYD Electronic (International) had debt of CN¥3.00b, up from none in one year. But it also has CN¥7.31b in cash to offset that, meaning it has CN¥4.31b net cash.

How Strong Is BYD Electronic (International)'s Balance Sheet?

According to the last reported balance sheet, BYD Electronic (International) had liabilities of CN¥31.7b due within 12 months, and liabilities of CN¥1.19b due beyond 12 months. Offsetting this, it had CN¥7.31b in cash and CN¥16.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.48b.

Since publicly traded BYD Electronic (International) shares are worth a very impressive total of CN¥76.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, BYD Electronic (International) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, BYD Electronic (International) grew its EBIT by 291% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BYD Electronic (International)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While BYD Electronic (International) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, BYD Electronic (International)'s free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While BYD Electronic (International) does have more liabilities than liquid assets, it also has net cash of CN¥4.31b. And we liked the look of last year's 291% year-on-year EBIT growth. So is BYD Electronic (International)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in BYD Electronic (International), you may well want to click here to check an interactive graph of its earnings per share history.

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.