Does Neusoft (SHSE:600718) Have A Healthy Balance Sheet?

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.' 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, Neusoft Corporation (SHSE:600718) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Neusoft

What Is Neusoft's Net Debt?

As you can see below, Neusoft had CN¥1.05b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥2.74b in cash, leading to a CN¥1.69b net cash position.

A Look At Neusoft's Liabilities

Zooming in on the latest balance sheet data, we can see that Neusoft had liabilities of CN¥7.73b due within 12 months and liabilities of CN¥1.92b due beyond that. Offsetting these obligations, it had cash of CN¥2.74b as well as receivables valued at CN¥2.29b due within 12 months. So its liabilities total CN¥4.62b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Neusoft is worth CN¥10.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Neusoft boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Neusoft made a loss at the EBIT level, last year, it was also good to see that it generated CN¥328m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Neusoft'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Neusoft 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. Happily for any shareholders, Neusoft actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Neusoft does have more liabilities than liquid assets, it also has net cash of CN¥1.69b. The cherry on top was that in converted 253% of that EBIT to free cash flow, bringing in CN¥831m. So we are not troubled with Neusoft'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. For instance, we've identified 2 warning signs for Neusoft that 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.