Here's Why Beyondsoft (SZSE:002649) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Beyondsoft Corporation (SZSE:002649) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Beyondsoft Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Beyondsoft had CN¥323.7m of debt, an increase on CN¥221.4m, over one year. But it also has CN¥1.85b in cash to offset that, meaning it has CN¥1.53b net cash.

How Strong Is Beyondsoft's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beyondsoft had liabilities of CN¥1.49b due within 12 months and liabilities of CN¥47.9m due beyond that. Offsetting this, it had CN¥1.85b in cash and CN¥2.21b in receivables that were due within 12 months. So it actually has CN¥2.52b more liquid assets than total liabilities.

This surplus liquidity suggests that Beyondsoft's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Beyondsoft has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Beyondsoft

The modesty of its debt load may become crucial for Beyondsoft if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beyondsoft 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beyondsoft 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. During the last three years, Beyondsoft produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beyondsoft has CN¥1.53b in net cash and a decent-looking balance sheet. So we don't have any problem with Beyondsoft's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Beyondsoft has 2 warning signs we think you should be aware of.

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.

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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.