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 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. As with many other companies Beken Corporation (SHSE:603068) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Beken's Net Debt?

As you can see below, at the end of September 2024, Beken had CN¥211.0m of debt, up from CN¥80.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.05b in cash, so it actually has CN¥842.2m net cash.

A Look At Beken's Liabilities

Zooming in on the latest balance sheet data, we can see that Beken had liabilities of CN¥438.9m due within 12 months and liabilities of CN¥30.7m due beyond that. On the other hand, it had cash of CN¥1.05b and CN¥186.5m worth of receivables due within a year. So it actually has CN¥770.2m more liquid assets than total liabilities.

This excess liquidity suggests that Beken is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Beken boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Beken will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beken wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to CN¥760m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Beken?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Beken lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥150m and booked a CN¥38m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥842.2m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Beken .

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.