David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Kingdee International Software Group Company Limited (HKG:268) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Kingdee International Software Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 Kingdee International Software Group had CN¥776.9m of debt, an increase on CN¥470.0m, over one year. However, its balance sheet shows it holds CN¥4.05b in cash, so it actually has CN¥3.28b net cash.
A Look At Kingdee International Software Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Kingdee International Software Group had liabilities of CN¥4.53b due within 12 months and liabilities of CN¥907.8m due beyond that. On the other hand, it had cash of CN¥4.05b and CN¥958.3m worth of receivables due within a year. So it has liabilities totalling CN¥426.8m more than its cash and near-term receivables, combined.
This state of affairs indicates that Kingdee International Software Group'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¥27.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Kingdee International Software Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kingdee International Software Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Kingdee International Software Group reported revenue of CN¥5.7b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Kingdee International Software Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Kingdee International Software Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥243m and booked a CN¥210m accounting loss. But the saving grace is the CN¥3.28b on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kingdee International Software Group is showing 1 warning sign in our investment analysis , you should know about...
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.