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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Beijing Jingcheng Machinery Electric Company Limited (HKG: 187) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Beijing Jingcheng Machinery Electric
What is the debt of Beijing Jingcheng Machinery Electric?
The image below, which you can click for more details, shows Beijing Jingcheng Machinery Electric owed CN 108.0 million in debt at the end of June 2021, a reduction from CN’s 297.6 million. over a year. However, his balance sheet shows that he has 109.9 million CN in cash, so he actually has a net cash position of 1.90 million CN.
How healthy is Beijing Jingcheng Machinery Electric’s track record?
According to the latest published balance sheet, Beijing Jingcheng Machinery Electric had debts of CN 531.5 million due within 12 months, and debts of CN 52.7 million due beyond 12 months. On the other hand, he had a cash position of CNN 109.9 million and CNN 218.3 million in receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 256.0 million yen.
Of course, Beijing Jingcheng Machinery Electric has a market cap of CN Â¥ 2.62b, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, Beijing Jingcheng Machinery Electric has a net cash flow, so it is fair to say that it does not have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Beijing Jingcheng Machinery Electric will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
In the past year, Beijing Jingcheng Machinery Electric recorded a loss before interest and taxes, and in fact reduced its revenue by 3.0%, to 1.1 billion yen. We would much prefer to see the growth.
So how risky are Beijing Jingcheng’s electric machines?
Although Beijing Jingcheng Machinery Electric recorded loss of profit before interest and taxes (EBIT) in the last twelve months, it made a statutory profit of CNN 179 million. So when you consider that it has net cash, as well as statutory profit, the security is probably not as risky as it looks, at least in the short term. With uninspiring revenue growth, we would really need to see positive EBIT before we can gather much enthusiasm for this business. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Beijing Jingcheng Machinery Electric you must be aware.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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