Is Thunder Software TechnologyLtd (SZSE:300496) Using Too Much Debt?

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. We note that Thunder Software Technology Co.,Ltd. (SZSE:300496) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Thunder Software TechnologyLtd

What Is Thunder Software TechnologyLtd's Debt?

As you can see below, at the end of December 2023, Thunder Software TechnologyLtd had CN¥20.3m of debt, up from CN¥14.5m a year ago. Click the image for more detail. But it also has CN¥4.63b in cash to offset that, meaning it has CN¥4.61b net cash.

A Look At Thunder Software TechnologyLtd's Liabilities

According to the last reported balance sheet, Thunder Software TechnologyLtd had liabilities of CN¥1.56b due within 12 months, and liabilities of CN¥147.9m due beyond 12 months. On the other hand, it had cash of CN¥4.63b and CN¥2.02b worth of receivables due within a year. So it actually has CN¥4.95b more liquid assets than total liabilities.

This excess liquidity suggests that Thunder Software TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Thunder Software TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Thunder Software TechnologyLtd's load is not too heavy, because its EBIT was down 67% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Thunder Software TechnologyLtd'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 Thunder Software TechnologyLtd 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 three years, Thunder Software TechnologyLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Thunder Software TechnologyLtd has CN¥4.61b in net cash and a decent-looking balance sheet. So we don't have any problem with Thunder Software TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Thunder Software TechnologyLtd .

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.