Does Shanghai Baosight SoftwareLtd (SHSE:600845) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Shanghai Baosight Software Co.,Ltd. (SHSE:600845) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Baosight SoftwareLtd

How Much Debt Does Shanghai Baosight SoftwareLtd Carry?

The image below, which you can click on for greater detail, shows that Shanghai Baosight SoftwareLtd had debt of CN¥98.1m at the end of September 2023, a reduction from CN¥158.0m over a year. However, its balance sheet shows it holds CN¥5.45b in cash, so it actually has CN¥5.35b net cash.

How Healthy Is Shanghai Baosight SoftwareLtd's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Baosight SoftwareLtd had liabilities of CN¥9.24b falling due within a year, and liabilities of CN¥906.5m due beyond that. Offsetting these obligations, it had cash of CN¥5.45b as well as receivables valued at CN¥7.22b due within 12 months. So it can boast CN¥2.52b more liquid assets than total liabilities.

This surplus suggests that Shanghai Baosight SoftwareLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Baosight SoftwareLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shanghai Baosight SoftwareLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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 Shanghai Baosight SoftwareLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shanghai Baosight SoftwareLtd 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, Shanghai Baosight SoftwareLtd produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Baosight SoftwareLtd has CN¥5.35b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 32% over the last year. So we don't think Shanghai Baosight SoftwareLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Shanghai Baosight SoftwareLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.