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. Importantly, Thunder Software Technology Co.,Ltd. (SZSE:300496) does carry debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Thunder Software TechnologyLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Thunder Software TechnologyLtd had CN¥69.5m of debt in September 2023, down from CN¥655.1m, one year before. But it also has CN¥4.77b in cash to offset that, meaning it has CN¥4.70b net cash.
A Look At Thunder Software TechnologyLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Thunder Software TechnologyLtd had liabilities of CN¥1.38b due within 12 months and liabilities of CN¥153.2m due beyond that. Offsetting these obligations, it had cash of CN¥4.77b as well as receivables valued at CN¥2.03b due within 12 months. So it can boast CN¥5.27b more liquid assets than total liabilities.
It's good to see that Thunder Software TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Thunder Software TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Thunder Software TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Thunder Software TechnologyLtd 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. Thunder Software TechnologyLtd 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, Thunder Software TechnologyLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Thunder Software TechnologyLtd has CN¥4.70b in net cash and a decent-looking balance sheet. So we are not troubled with Thunder Software TechnologyLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Thunder Software TechnologyLtd you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.