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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is BAIC BluePark New Energy TechnologyLtd's Debt?
As you can see below, BAIC BluePark New Energy TechnologyLtd had CN¥12.5b of debt at September 2023, down from CN¥14.5b a year prior. On the flip side, it has CN¥5.82b in cash leading to net debt of about CN¥6.66b.
How Healthy Is BAIC BluePark New Energy TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that BAIC BluePark New Energy TechnologyLtd had liabilities of CN¥15.8b due within 12 months and liabilities of CN¥7.74b due beyond that. Offsetting these obligations, it had cash of CN¥5.82b as well as receivables valued at CN¥8.54b due within 12 months. So it has liabilities totalling CN¥9.15b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since BAIC BluePark New Energy TechnologyLtd has a market capitalization of CN¥44.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BAIC BluePark New Energy TechnologyLtd can strengthen its balance sheet over time. 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, BAIC BluePark New Energy TechnologyLtd reported revenue of CN¥13b, which is a gain of 58%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, BAIC BluePark New Energy TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥5.1b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥3.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with BAIC BluePark New Energy TechnologyLtd (at least 1 which is concerning) , and understanding them should be part of your investment process.
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.