Here's Why Beijing SuperMap Software (SZSE:300036) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Beijing SuperMap Software Co., Ltd. (SZSE:300036) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing SuperMap Software

How Much Debt Does Beijing SuperMap Software Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing SuperMap Software had CN¥18.4m of debt in March 2024, down from CN¥30.1m, one year before. However, it does have CN¥1.48b in cash offsetting this, leading to net cash of CN¥1.46b.

How Strong Is Beijing SuperMap Software's Balance Sheet?

According to the last reported balance sheet, Beijing SuperMap Software had liabilities of CN¥1.28b due within 12 months, and liabilities of CN¥15.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.48b as well as receivables valued at CN¥900.8m due within 12 months. So it actually has CN¥1.09b more liquid assets than total liabilities.

It's good to see that Beijing SuperMap Software has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Beijing SuperMap Software boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Beijing SuperMap Software turned things around in the last 12 months, delivering and EBIT of CN¥101m. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing SuperMap Software has net cash of CN¥1.46b, as well as more liquid assets than liabilities. So we don't have any problem with Beijing SuperMap Software's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Beijing SuperMap Software is showing 1 warning sign in our investment analysis , you should know about...

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.