Fujian Rongji Software (SZSE:002474) Is Making Moderate Use Of Debt

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. We note that Fujian Rongji Software Co., Ltd. (SZSE:002474) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Fujian Rongji Software Carry?

As you can see below, Fujian Rongji Software had CN¥589.4m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥189.7m in cash leading to net debt of about CN¥399.7m.

How Strong Is Fujian Rongji Software's Balance Sheet?

We can see from the most recent balance sheet that Fujian Rongji Software had liabilities of CN¥998.2m falling due within a year, and liabilities of CN¥99.2m due beyond that. Offsetting this, it had CN¥189.7m in cash and CN¥284.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥622.7m more than its cash and near-term receivables, combined.

Of course, Fujian Rongji Software has a market capitalization of CN¥4.23b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Fujian Rongji Software's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Fujian Rongji Software

Over 12 months, Fujian Rongji Software made a loss at the EBIT level, and saw its revenue drop to CN¥435m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

While Fujian Rongji Software's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥94m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥55m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 2 warning signs for Fujian Rongji Software (1 is potentially serious) you should be aware of.

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.