The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, GuoChuang Software Co.,Ltd. (SZSE:300520) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 GuoChuang SoftwareLtd
How Much Debt Does GuoChuang SoftwareLtd Carry?
As you can see below, at the end of September 2023, GuoChuang SoftwareLtd had CN¥1.12b of debt, up from CN¥867.5m a year ago. Click the image for more detail. However, it also had CN¥620.8m in cash, and so its net debt is CN¥498.7m.
How Strong Is GuoChuang SoftwareLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that GuoChuang SoftwareLtd had liabilities of CN¥2.36b due within 12 months and liabilities of CN¥253.6m due beyond that. Offsetting these obligations, it had cash of CN¥620.8m as well as receivables valued at CN¥1.36b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥640.4m.
Since publicly traded GuoChuang SoftwareLtd shares are worth a total of CN¥5.88b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 GuoChuang SoftwareLtd 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 GuoChuang SoftwareLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 41%, to CN¥2.8b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though GuoChuang SoftwareLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥44m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥567m of cash over the last year. So in short it's a really risky stock. For riskier companies like GuoChuang SoftwareLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.