Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that B-SOFT Co.,Ltd. (SZSE:300451) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for B-SOFTLtd

How Much Debt Does B-SOFTLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2022 B-SOFTLtd had debt of CN¥150.0m, up from CN¥21.0m in one year. But on the other hand it also has CN¥1.48b in cash, leading to a CN¥1.33b net cash position.

How Strong Is B-SOFTLtd's Balance Sheet?

The latest balance sheet data shows that B-SOFTLtd had liabilities of CN¥1.01b due within a year, and liabilities of CN¥9.22m falling due after that. On the other hand, it had cash of CN¥1.48b and CN¥1.69b worth of receivables due within a year. So it actually has CN¥2.15b more liquid assets than total liabilities.

This excess liquidity suggests that B-SOFTLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, B-SOFTLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that B-SOFTLtd has increased its EBIT by 8.9% over twelve months, which should ease any concerns about debt repayment. 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 B-SOFTLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. B-SOFTLtd 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. Over the last three years, B-SOFTLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that B-SOFTLtd has net cash of CN¥1.33b, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.9% over the last year. So we don't have any problem with B-SOFTLtd's use of debt. 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 B-SOFTLtd's earnings per share history for free.

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.