Warren Buffett famously said, '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 note that Hangzhou Anysoft Information Technology Co., Ltd. (SZSE:300571) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Hangzhou Anysoft Information Technology
How Much Debt Does Hangzhou Anysoft Information Technology Carry?
The image below, which you can click on for greater detail, shows that Hangzhou Anysoft Information Technology had debt of CN¥996.1m at the end of September 2023, a reduction from CN¥1.49b over a year. However, it also had CN¥183.9m in cash, and so its net debt is CN¥812.3m.
How Healthy Is Hangzhou Anysoft Information Technology's Balance Sheet?
According to the last reported balance sheet, Hangzhou Anysoft Information Technology had liabilities of CN¥1.34b due within 12 months, and liabilities of CN¥345.6m due beyond 12 months. On the other hand, it had cash of CN¥183.9m and CN¥2.03b worth of receivables due within a year. So it actually has CN¥526.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Hangzhou Anysoft Information Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 Hangzhou Anysoft Information Technology 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.
In the last year Hangzhou Anysoft Information Technology had a loss before interest and tax, and actually shrunk its revenue by 58%, to CN¥1.8b. That makes us nervous, to say the least.
Caveat Emptor
While Hangzhou Anysoft Information Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥14m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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. Case in point: We've spotted 2 warning signs for Hangzhou Anysoft Information Technology you should be aware of.
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.