Shanghai Baosight SoftwareLtd (SHSE:600845) Could Easily Take On More Debt
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.' 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 note that Shanghai Baosight Software Co.,Ltd. (SHSE:600845) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Shanghai Baosight SoftwareLtd
How Much Debt Does Shanghai Baosight SoftwareLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Shanghai Baosight SoftwareLtd had CN„69.1m of debt in March 2024, down from CN„148.1m, one year before. However, it does have CN„6.26b in cash offsetting this, leading to net cash of CN„6.20b.
How Healthy Is Shanghai Baosight SoftwareLtd's Balance Sheet?
The latest balance sheet data shows that Shanghai Baosight SoftwareLtd had liabilities of CN„8.66b due within a year, and liabilities of CN„977.5m falling due after that. On the other hand, it had cash of CN„6.26b and CN„7.74b worth of receivables due within a year. So it actually has CN„4.37b more liquid assets than total liabilities.
This short term liquidity is a sign that Shanghai Baosight SoftwareLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.
Also good is that Shanghai Baosight SoftwareLtd grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 Shanghai Baosight SoftwareLtd 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Baosight SoftwareLtd 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. During the last three years, Shanghai Baosight SoftwareLtd generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shanghai Baosight SoftwareLtd has CN„6.20b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN„2.2b. So we don't think Shanghai Baosight SoftwareLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai Baosight SoftwareLtd is showing 1 warning sign in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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About SHSE:600845
Undervalued with solid track record and pays a dividend.
