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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Beijing Ultrapower Software Co., Ltd. (SZSE:300002) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing Ultrapower Software

What Is Beijing Ultrapower Software's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Ultrapower Software had debt of CN¥26.6m, up from CN¥20.0m in one year. But it also has CN¥2.43b in cash to offset that, meaning it has CN¥2.40b net cash.

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¥950.5m due within 12 months and liabilities of CN¥31.1m due beyond that. Offsetting this, it had CN¥2.43b in cash and CN¥708.0m in receivables that were due within 12 months. So it actually has CN¥2.16b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Ultrapower Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beijing Ultrapower Software boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Beijing Ultrapower Software grew its EBIT by 81% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beijing Ultrapower Software 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. Over the last three years, Beijing Ultrapower Software actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Ultrapower Software has CN¥2.40b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 109% of its EBIT. So is Beijing Ultrapower Software's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Beijing Ultrapower Software, you may well want to click here to check an interactive graph of its earnings per share history.

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.