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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BOE Technology Group Company Limited (SZSE:000725) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

See our latest analysis for BOE Technology Group

How Much Debt Does BOE Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that BOE Technology Group had CN¥148.5b of debt in September 2023, down from CN¥158.9b, one year before. However, it also had CN¥74.9b in cash, and so its net debt is CN¥73.6b.

How Healthy Is BOE Technology Group's Balance Sheet?

According to the last reported balance sheet, BOE Technology Group had liabilities of CN¥89.0b due within 12 months, and liabilities of CN¥132.2b due beyond 12 months. Offsetting these obligations, it had cash of CN¥74.9b as well as receivables valued at CN¥34.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥112.1b.

This is a mountain of leverage even relative to its gargantuan market capitalization of CN¥134.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 BOE Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, BOE Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥172b, which is a fall of 8.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months BOE Technology Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥8.6b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥12b and the profit of CN¥2.7b. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that BOE Technology Group is showing 3 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.