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. We note that BAIC BluePark New Energy Technology Co.,Ltd. (SHSE:600733) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for BAIC BluePark New Energy TechnologyLtd
How Much Debt Does BAIC BluePark New Energy TechnologyLtd Carry?
As you can see below, BAIC BluePark New Energy TechnologyLtd had CN¥9.93b of debt at June 2023, down from CN¥18.7b a year prior. However, it does have CN¥7.96b in cash offsetting this, leading to net debt of about CN¥1.98b.
A Look At BAIC BluePark New Energy TechnologyLtd's Liabilities
According to the last reported balance sheet, BAIC BluePark New Energy TechnologyLtd had liabilities of CN¥16.4b due within 12 months, and liabilities of CN¥5.98b due beyond 12 months. On the other hand, it had cash of CN¥7.96b and CN¥8.79b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.63b.
Since publicly traded BAIC BluePark New Energy TechnologyLtd shares are worth a total of CN¥39.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine BAIC BluePark New Energy TechnologyLtd'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.
In the last year BAIC BluePark New Energy TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥12b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate BAIC BluePark New Energy TechnologyLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥5.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.8b of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for BAIC BluePark New Energy TechnologyLtd 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.
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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.