Is Great Chinasoft TechnologyLtd (SZSE:002453) A Risky Investment?

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 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 Great Chinasoft Technology Co.,Ltd. (SZSE:002453) 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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Great Chinasoft TechnologyLtd

What Is Great Chinasoft TechnologyLtd's Net Debt?

As you can see below, Great Chinasoft TechnologyLtd had CN¥253.1m of debt at March 2024, down from CN¥823.1m a year prior. However, it does have CN¥338.1m in cash offsetting this, leading to net cash of CN¥85.0m.

A Look At Great Chinasoft TechnologyLtd's Liabilities

The latest balance sheet data shows that Great Chinasoft TechnologyLtd had liabilities of CN¥723.5m due within a year, and liabilities of CN¥24.6m falling due after that. Offsetting these obligations, it had cash of CN¥338.1m as well as receivables valued at CN¥422.9m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Great Chinasoft TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.29b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Great Chinasoft TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Great Chinasoft TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Great Chinasoft TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥549m, which is a fall of 71%. That makes us nervous, to say the least.

So How Risky Is Great Chinasoft TechnologyLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Great Chinasoft TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥127m of cash and made a loss of CN¥179m. But the saving grace is the CN¥85.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 1 warning sign we've spotted with Great Chinasoft TechnologyLtd .

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.