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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that B-SOFT Co.,Ltd. (SZSE:300451) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is B-SOFTLtd's Net Debt?

As you can see below, B-SOFTLtd had CN¥77.2m of debt at September 2023, down from CN¥150.0m a year prior. But on the other hand it also has CN¥976.7m in cash, leading to a CN¥899.6m net cash position.

A Look At B-SOFTLtd's Liabilities

We can see from the most recent balance sheet that B-SOFTLtd had liabilities of CN¥1.02b falling due within a year, and liabilities of CN¥7.37m due beyond that. Offsetting this, it had CN¥976.7m in cash and CN¥1.86b in receivables that were due within 12 months. So it actually has CN¥1.81b more liquid assets than total liabilities.

This excess liquidity suggests that B-SOFTLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that B-SOFTLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact B-SOFTLtd's saving grace is its low debt levels, because its EBIT has tanked 91% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, B-SOFTLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case B-SOFTLtd has CN¥899.6m in net cash and a decent-looking balance sheet. So we don't have any problem with B-SOFTLtd's use of debt. Even though B-SOFTLtd lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.