Beijing Enterprises Water Group (HKG:371) Seems To Be Using A Lot Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Enterprises Water Group Limited (HKG:371) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Enterprises Water Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Beijing Enterprises Water Group had CN¥75.2b in debt in June 2025; about the same as the year before. However, because it has a cash reserve of CN¥8.65b, its net debt is less, at about CN¥66.6b.

How Strong Is Beijing Enterprises Water Group's Balance Sheet?

The latest balance sheet data shows that Beijing Enterprises Water Group had liabilities of CN¥41.2b due within a year, and liabilities of CN¥68.7b falling due after that. Offsetting these obligations, it had cash of CN¥8.65b as well as receivables valued at CN¥25.9b due within 12 months. So its liabilities total CN¥75.4b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥22.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Beijing Enterprises Water Group would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Beijing Enterprises Water Group

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With a net debt to EBITDA ratio of 10.1, it's fair to say Beijing Enterprises Water Group does have a significant amount of debt. However, its interest coverage of 2.5 is reasonably strong, which is a good sign. Even more troubling is the fact that Beijing Enterprises Water Group actually let its EBIT decrease by 9.8% over the last year. If that earnings trend continues the company will face an uphill battle to pay off its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing Enterprises Water Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Beijing Enterprises Water Group's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

To be frank both Beijing Enterprises Water Group's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its EBIT growth rate also fails to instill confidence. We should also note that Water Utilities industry companies like Beijing Enterprises Water Group commonly do use debt without problems. Taking into account all the aforementioned factors, it looks like Beijing Enterprises Water Group has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Beijing Enterprises Water Group you should be aware of, and 1 of them is a bit concerning.

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.