Does B-SOFTLtd (SZSE:300451) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies B-SOFT Co.,Ltd. (SZSE:300451) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for B-SOFTLtd

What Is B-SOFTLtd's Net Debt?

The image below, which you can click on for greater detail, shows that B-SOFTLtd had debt of CN¥77.2m at the end of September 2023, a reduction from CN¥150.0m over a year. However, its balance sheet shows it holds CN¥976.7m in cash, so it actually has CN¥899.6m net cash.

A Look At B-SOFTLtd's Liabilities

The latest balance sheet data shows that B-SOFTLtd had liabilities of CN¥1.02b due within a year, and liabilities of CN¥7.37m falling due after that. On the other hand, it had cash of CN¥976.7m and CN¥1.86b worth of receivables due within a year. So it can boast CN¥1.81b more liquid assets than total liabilities.

It's good to see that B-SOFTLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 B-SOFTLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While B-SOFTLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, B-SOFTLtd 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 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.

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.