Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Wisesoft Co., Ltd. (SZSE:002253) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Wisesoft
What Is Wisesoft's Debt?
As you can see below, at the end of September 2022, Wisesoft had CN¥107.4m of debt, up from CN¥72.8m a year ago. Click the image for more detail. However, it does have CN¥73.1m in cash offsetting this, leading to net debt of about CN¥34.3m.
How Strong Is Wisesoft's Balance Sheet?
The latest balance sheet data shows that Wisesoft had liabilities of CN¥139.8m due within a year, and liabilities of CN¥176.2m falling due after that. Offsetting these obligations, it had cash of CN¥73.1m as well as receivables valued at CN¥243.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Wisesoft's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.32b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Wisesoft has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wisesoft's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Wisesoft had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥247m. That makes us nervous, to say the least.
Caveat Emptor
While Wisesoft's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥27m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wisesoft you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.