Health Check: How Prudently Does GuoChuang SoftwareLtd (SZSE:300520) Use Debt?

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.' 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 can see that GuoChuang Software Co.,Ltd. (SZSE:300520) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 GuoChuang SoftwareLtd

What Is GuoChuang SoftwareLtd's Debt?

As you can see below, at the end of March 2024, GuoChuang SoftwareLtd had CN¥1.11b of debt, up from CN¥946.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.38b in cash, leading to a CN¥271.5m net cash position.

How Strong Is GuoChuang SoftwareLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GuoChuang SoftwareLtd had liabilities of CN¥2.42b due within 12 months and liabilities of CN¥441.8m due beyond that. On the other hand, it had cash of CN¥1.38b and CN¥1.45b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that GuoChuang SoftwareLtd'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¥4.82b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, GuoChuang SoftwareLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GuoChuang SoftwareLtd'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.

Over 12 months, GuoChuang SoftwareLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 12%. We would much prefer see growth.

So How Risky Is GuoChuang SoftwareLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that GuoChuang SoftwareLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥527m of cash and made a loss of CN¥377m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥271.5m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 GuoChuang SoftwareLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.