Is Shanghai Amarsoft Information & TechnologyLtd (SZSE:300380) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shanghai Amarsoft Information & Technology Co.,Ltd (SZSE:300380) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Amarsoft Information & TechnologyLtd

How Much Debt Does Shanghai Amarsoft Information & TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shanghai Amarsoft Information & TechnologyLtd had CN¥343.7m of debt, an increase on CN¥297.1m, over one year. However, it also had CN¥137.8m in cash, and so its net debt is CN¥206.0m.

How Healthy Is Shanghai Amarsoft Information & TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Shanghai Amarsoft Information & TechnologyLtd had liabilities of CN¥704.5m due within a year, and liabilities of CN¥9.41m falling due after that. Offsetting these obligations, it had cash of CN¥137.8m as well as receivables valued at CN¥223.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥352.6m.

Since publicly traded Shanghai Amarsoft Information & TechnologyLtd shares are worth a total of CN¥8.82b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Amarsoft Information & TechnologyLtd'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.

Over 12 months, Shanghai Amarsoft Information & TechnologyLtd reported revenue of CN¥915m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Shanghai Amarsoft Information & TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥5.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥7.0m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 3 warning signs for Shanghai Amarsoft Information & TechnologyLtd you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.