Beijing SuperMap Software (SZSE:300036) Seems To Use Debt Quite Sensibly

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. Importantly, Beijing SuperMap Software Co., Ltd. (SZSE:300036) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing SuperMap Software

How Much Debt Does Beijing SuperMap Software Carry?

As you can see below, at the end of September 2024, Beijing SuperMap Software had CN¥26.5m of debt, up from CN¥23.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.05b in cash, leading to a CN¥1.03b net cash position.

How Healthy Is Beijing SuperMap Software's Balance Sheet?

The latest balance sheet data shows that Beijing SuperMap Software had liabilities of CN¥1.24b due within a year, and liabilities of CN¥13.0m falling due after that. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥878.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing SuperMap Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing SuperMap Software has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Beijing SuperMap Software made a loss at the EBIT level, last year, it was also good to see that it generated CN¥10m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing SuperMap Software's ability to maintain a healthy balance sheet going forward. 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 SuperMap 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. Over the last year, Beijing SuperMap Software saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing SuperMap Software has CN¥1.03b in net cash and a decent-looking balance sheet. So we are not troubled with Beijing SuperMap Software's debt use. 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. Case in point: We've spotted 2 warning signs for Beijing SuperMap Software you should be aware of, and 1 of them doesn't sit too well with us.

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.