We Think Shanghai Amarsoft Information & TechnologyLtd (SZSE:300380) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shanghai Amarsoft Information & Technology Co.,Ltd (SZSE:300380) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Shanghai Amarsoft Information & TechnologyLtd

How Much Debt Does Shanghai Amarsoft Information & TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Amarsoft Information & TechnologyLtd had debt of CN¥343.7m, up from CN¥297.1m in one year. However, it does have CN¥137.8m in cash offsetting this, leading to net debt of about 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 total CN¥352.6m more than the combination of its cash and short-term receivables.

Of course, Shanghai Amarsoft Information & TechnologyLtd has a market capitalization of CN¥6.49b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Amarsoft Information & TechnologyLtd will need earnings to service that debt. 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. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shanghai Amarsoft Information & TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥5.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shanghai Amarsoft Information & TechnologyLtd has 3 warning signs we think 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.

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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.