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Is Beijing Beida Jade Bird Universal Sci-Tech (HKG:8095) Using Too Much Debt?

Simply Wall St

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'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Beijing Beida Jade Bird Universal Sci-Tech Company Limited (HKG:8095) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Beijing Beida Jade Bird Universal Sci-Tech

What Is Beijing Beida Jade Bird Universal Sci-Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Beijing Beida Jade Bird Universal Sci-Tech had CN¥320.9m of debt, an increase on CN¥226, over one year. But it also has CN¥517.6m in cash to offset that, meaning it has CN¥196.8m net cash.

SEHK:8095 Historical Debt, January 24th 2020

How Healthy Is Beijing Beida Jade Bird Universal Sci-Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Beida Jade Bird Universal Sci-Tech had liabilities of CN¥879.8m due within 12 months and liabilities of CN¥68.8m due beyond that. Offsetting these obligations, it had cash of CN¥517.6m as well as receivables valued at CN¥1.37b due within 12 months. So it can boast CN¥940.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Beijing Beida Jade Bird Universal Sci-Tech's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Beijing Beida Jade Bird Universal Sci-Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Beijing Beida Jade Bird Universal Sci-Tech grew its EBIT by 248% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beijing Beida Jade Bird Universal Sci-Tech will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Beida Jade Bird Universal Sci-Tech 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. Over the last three years, Beijing Beida Jade Bird Universal Sci-Tech reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Beijing Beida Jade Bird Universal Sci-Tech has CN¥196.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 248% over the last year. So we don't think Beijing Beida Jade Bird Universal Sci-Tech's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Beijing Beida Jade Bird Universal Sci-Tech (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.