We Think Beijing Ultrapower Software (SZSE:300002) Can Manage Its Debt With Ease

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.' 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 Beijing Ultrapower Software Co., Ltd. (SZSE:300002) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Ultrapower Software

How Much Debt Does Beijing Ultrapower Software Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing Ultrapower Software had CN¥43.9m of debt in June 2024, down from CN¥55.6m, one year before. But it also has CN¥3.22b in cash to offset that, meaning it has CN¥3.17b net cash.

A Look At Beijing Ultrapower Software's Liabilities

According to the last reported balance sheet, Beijing Ultrapower Software had liabilities of CN¥918.0m due within 12 months, and liabilities of CN¥29.8m due beyond 12 months. Offsetting this, it had CN¥3.22b in cash and CN¥779.9m in receivables that were due within 12 months. So it actually has CN¥3.05b 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. 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 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Beijing Ultrapower Software actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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¥3.17b, as well as more liquid assets than liabilities. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in CN¥1.1b. So is Beijing Ultrapower Software's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing Ultrapower Software has 1 warning sign we think you should be aware of.

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.