Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Bestechnic (Shanghai) Co., Ltd. (SHSE:688608) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Bestechnic (Shanghai) Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Bestechnic (Shanghai) had debt of CN¥20.0m, up from none in one year. But it also has CN¥4.75b in cash to offset that, meaning it has CN¥4.73b net cash.

How Healthy Is Bestechnic (Shanghai)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bestechnic (Shanghai) had liabilities of CN¥357.2m due within 12 months and liabilities of CN¥11.9m due beyond that. On the other hand, it had cash of CN¥4.75b and CN¥465.4m worth of receivables due within a year. So it can boast CN¥4.84b more liquid assets than total liabilities.

This excess liquidity is a great indication that Bestechnic (Shanghai)'s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Bestechnic (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Bestechnic (Shanghai) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥22m in EBIT over the last twelve months. 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 Bestechnic (Shanghai)'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bestechnic (Shanghai) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Bestechnic (Shanghai) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bestechnic (Shanghai) has net cash of CN¥4.73b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥242m, being 1,106% of its EBIT. So is Bestechnic (Shanghai)'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 Bestechnic (Shanghai), you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.