Here's Why Jiangsu Hoperun Software (SZSE:300339) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Jiangsu Hoperun Software Co., Ltd. (SZSE:300339) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Hoperun Software

How Much Debt Does Jiangsu Hoperun Software Carry?

As you can see below, Jiangsu Hoperun Software had CN¥772.3m of debt at September 2023, down from CN¥876.8m a year prior. On the flip side, it has CN¥467.7m in cash leading to net debt of about CN¥304.6m.

A Look At Jiangsu Hoperun Software's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Hoperun Software had liabilities of CN¥1.10b due within 12 months and liabilities of CN¥469.6m due beyond that. On the other hand, it had cash of CN¥467.7m and CN¥1.72b worth of receivables due within a year. So it can boast CN¥622.4m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Hoperun Software has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu Hoperun Software's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jiangsu Hoperun Software had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to CN¥2.9b. We would much prefer see growth.

Caveat Emptor

Importantly, Jiangsu Hoperun Software had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥3.4m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of CN¥6.6m and profit of CN¥82m over the last year. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Hoperun Software .

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.