Thunder Software TechnologyLtd (SZSE:300496) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Thunder Software Technology Co.,Ltd. (SZSE:300496) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Thunder Software TechnologyLtd

What Is Thunder Software TechnologyLtd's Debt?

As you can see below, Thunder Software TechnologyLtd had CN¥17.8m of debt at March 2024, down from CN¥76.4m a year prior. However, it does have CN¥4.50b in cash offsetting this, leading to net cash of CN¥4.49b.

A Look At Thunder Software TechnologyLtd's Liabilities

The latest balance sheet data shows that Thunder Software TechnologyLtd had liabilities of CN¥1.58b due within a year, and liabilities of CN¥144.1m falling due after that. On the other hand, it had cash of CN¥4.50b and CN¥2.10b worth of receivables due within a year. So it actually has CN¥4.87b more liquid assets than total liabilities.

It's good to see that Thunder Software TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face 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 84% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Thunder Software TechnologyLtd can strengthen its balance sheet over time. 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 we empathize with investors who find debt concerning, you should keep in mind that Thunder Software TechnologyLtd has net cash of CN¥4.49b, as well as more liquid assets than liabilities. So we are not troubled with Thunder Software TechnologyLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Thunder Software TechnologyLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.