Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, GuoChuang Software Co.,Ltd. (SZSE:300520) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for GuoChuang SoftwareLtd
You can click the graphic below for the historical numbers, but it shows that GuoChuang SoftwareLtd had CN¥1.02b of debt in June 2024, down from CN¥1.08b, one year before. But it also has CN¥1.11b in cash to offset that, meaning it has CN¥97.7m net cash.
We can see from the most recent balance sheet that GuoChuang SoftwareLtd had liabilities of CN¥2.09b falling due within a year, and liabilities of CN¥457.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.11b as well as receivables valued at CN¥1.36b due within 12 months. So it has liabilities totalling CN¥74.4m more than its cash and near-term receivables, combined.
This state of affairs indicates that GuoChuang SoftwareLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.67b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, GuoChuang SoftwareLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 GuoChuang SoftwareLtd'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.
Over 12 months, GuoChuang SoftwareLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.1b, which is a fall of 24%. To be frank that doesn't bode well.
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year GuoChuang SoftwareLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥556m of cash and made a loss of CN¥447m. But at least it has CN¥97.7m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. Be aware that GuoChuang SoftwareLtd is showing 1 warning sign in our investment analysis , you should know about...
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.