We Think Beijing Kingsoft Office Software (SHSE:688111) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 Beijing Kingsoft Office Software, Inc. (SHSE:688111) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing Kingsoft Office Software

What Is Beijing Kingsoft Office Software's Net Debt?

As you can see below, at the end of September 2024, Beijing Kingsoft Office Software had CN¥26.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.91b in cash, so it actually has CN¥2.88b net cash.

A Look At Beijing Kingsoft Office Software's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Kingsoft Office Software had liabilities of CN¥3.01b due within 12 months and liabilities of CN¥879.1m due beyond that. Offsetting this, it had CN¥2.91b in cash and CN¥569.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥416.2m.

Having regard to Beijing Kingsoft Office Software's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥122.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Beijing Kingsoft Office Software boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Beijing Kingsoft Office Software has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 Beijing Kingsoft Office Software'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Beijing Kingsoft Office Software 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, Beijing Kingsoft Office Software actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Beijing Kingsoft Office Software's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.88b. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in CN¥2.0b. So we don't think Beijing Kingsoft Office Software's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Beijing Kingsoft Office Software , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.