Health Check: How Prudently Does Bingo Software (SHSE:688227) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Bingo Software Co., Ltd. (SHSE:688227) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bingo Software

What Is Bingo Software's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bingo Software had CN¥177.2m of debt, an increase on CN¥43.7m, over one year. But on the other hand it also has CN¥222.7m in cash, leading to a CN¥45.5m net cash position.

A Look At Bingo Software's Liabilities

We can see from the most recent balance sheet that Bingo Software had liabilities of CN¥505.1m falling due within a year, and liabilities of CN¥53.5m due beyond that. Offsetting this, it had CN¥222.7m in cash and CN¥557.5m in receivables that were due within 12 months. So it can boast CN¥221.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Bingo Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bingo Software boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bingo Software will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Bingo Software wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to CN¥548m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Bingo Software?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bingo Software lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥226m of cash and made a loss of CN¥13m. Given it only has net cash of CN¥45.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Bingo Software is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.