Does Beijing Ultrapower Software (SZSE:300002) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Beijing Ultrapower Software Co., Ltd. (SZSE:300002) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Ultrapower Software

What Is Beijing Ultrapower Software's Debt?

As you can see below, Beijing Ultrapower Software had CN¥46.8m of debt at March 2024, down from CN¥70.1m a year prior. However, it does have CN¥2.54b in cash offsetting this, leading to net cash of CN¥2.50b.

How Strong Is Beijing Ultrapower Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Ultrapower Software had liabilities of CN¥877.8m due within 12 months and liabilities of CN¥33.7m due beyond that. Offsetting this, it had CN¥2.54b in cash and CN¥786.6m in receivables that were due within 12 months. So it can boast CN¥2.42b more liquid assets than total liabilities.

This surplus suggests that Beijing Ultrapower Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Ultrapower Software has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Beijing Ultrapower Software has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. 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 Beijing Ultrapower Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Ultrapower Software has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Beijing Ultrapower Software generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Ultrapower Software has net cash of CN¥2.50b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.1b, being 98% of its EBIT. So we don't think Beijing Ultrapower Software's use of debt is 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. We've identified 1 warning sign with Beijing Ultrapower Software , and understanding them should be part of your investment process.

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.