Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bringspring Science and Technology Co., Ltd. (SZSE:300290) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Bringspring Science and Technology Carry?
You can click the graphic below for the historical numbers, but it shows that Bringspring Science and Technology had CN¥26.1m of debt in March 2024, down from CN¥41.3m, one year before. However, it does have CN¥170.9m in cash offsetting this, leading to net cash of CN¥144.8m.
How Strong Is Bringspring Science and Technology's Balance Sheet?
The latest balance sheet data shows that Bringspring Science and Technology had liabilities of CN¥517.9m due within a year, and liabilities of CN¥32.5m falling due after that. Offsetting these obligations, it had cash of CN¥170.9m as well as receivables valued at CN¥469.5m due within 12 months. So it can boast CN¥90.0m more liquid assets than total liabilities.
Having regard to Bringspring Science and Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥7.35b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Bringspring Science and Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Bringspring Science and Technology turned things around in the last 12 months, delivering and EBIT of CN¥22m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bringspring Science and Technology 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bringspring Science and Technology 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. In the last year, Bringspring Science and Technology created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Bringspring Science and Technology has net cash of CN¥144.8m, as well as more liquid assets than liabilities. So we don't have any problem with Bringspring Science and Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Bringspring Science and Technology has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.