These 4 Measures Indicate That Servyou Software Group (SHSE:603171) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Servyou Software Group Co., Ltd. (SHSE:603171) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, 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.

View our latest analysis for Servyou Software Group

How Much Debt Does Servyou Software Group Carry?

As you can see below, Servyou Software Group had CN¥296.4m of debt at March 2024, down from CN¥322.3m a year prior. But it also has CN¥1.89b in cash to offset that, meaning it has CN¥1.59b net cash.

How Healthy Is Servyou Software Group's Balance Sheet?

According to the last reported balance sheet, Servyou Software Group had liabilities of CN¥1.25b due within 12 months, and liabilities of CN¥78.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.89b as well as receivables valued at CN¥248.8m due within 12 months. So it actually has CN¥809.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Servyou Software Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Servyou Software Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Servyou Software Group's load is not too heavy, because its EBIT was down 91% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Servyou Software Group 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. Servyou Software Group 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. Over the last three years, Servyou Software Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Servyou Software Group has CN¥1.59b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Servyou Software Group's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Servyou Software Group is showing 2 warning signs in our investment analysis , you should know about...

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.

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