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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Fujian Boss Software Corp. (SZSE:300525) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for Fujian Boss Software

How Much Debt Does Fujian Boss Software Carry?

As you can see below, Fujian Boss Software had CN¥82.0m of debt at March 2022, down from CN¥220.1m a year prior. However, it does have CN¥632.2m in cash offsetting this, leading to net cash of CN¥550.2m.

A Look At Fujian Boss Software's Liabilities

We can see from the most recent balance sheet that Fujian Boss Software had liabilities of CN¥477.5m falling due within a year, and liabilities of CN¥33.2m due beyond that. Offsetting these obligations, it had cash of CN¥632.2m as well as receivables valued at CN¥640.6m due within 12 months. So it actually has CN¥762.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Fujian Boss Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fujian Boss Software boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Fujian Boss Software grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fujian Boss Software can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fujian Boss Software may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Fujian Boss Software recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Boss Software has net cash of CN¥550.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Fujian Boss Software's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fujian Boss Software's earnings per share history for free.

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.