Does Beijing VRV Software (SZSE:300352) Have A Healthy Balance Sheet?

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.' 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. Importantly, Beijing VRV Software Corporation Limited (SZSE:300352) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Beijing VRV Software

How Much Debt Does Beijing VRV Software Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing VRV Software had debt of CN¥215.6m, up from CN¥194.1m in one year. On the flip side, it has CN¥67.3m in cash leading to net debt of about CN¥148.3m.

How Healthy Is Beijing VRV Software's Balance Sheet?

According to the last reported balance sheet, Beijing VRV Software had liabilities of CN¥808.0m due within 12 months, and liabilities of CN¥8.53m due beyond 12 months. Offsetting this, it had CN¥67.3m in cash and CN¥677.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥71.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Beijing VRV Software's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥9.16b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing VRV Software's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing VRV Software wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to CN¥583m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Beijing VRV Software had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥56m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥80m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Beijing VRV Software (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.