We Think Shanghai Baosight SoftwareLtd (SHSE:600845) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shanghai Baosight Software Co.,Ltd. (SHSE:600845) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Baosight SoftwareLtd's Debt?

As you can see below, Shanghai Baosight SoftwareLtd had CN¥64.0m of debt at September 2024, down from CN¥98.1m a year prior. But on the other hand it also has CN¥4.99b in cash, leading to a CN¥4.93b net cash position.

How Healthy Is Shanghai Baosight SoftwareLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Baosight SoftwareLtd had liabilities of CN¥8.55b due within 12 months, and liabilities of CN¥956.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.99b as well as receivables valued at CN¥8.05b due within 12 months. So it can boast CN¥3.53b 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. Succinctly put, Shanghai Baosight SoftwareLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Shanghai Baosight SoftwareLtd

The good news is that Shanghai Baosight SoftwareLtd has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. 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'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. 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 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Baosight SoftwareLtd has net cash of CN¥4.93b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.3b, being 84% of its EBIT. So is Shanghai Baosight SoftwareLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Shanghai Baosight SoftwareLtd 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.