Is GuoChuang SoftwareLtd (SZSE:300520) Weighed On By Its Debt Load?

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.' 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. Importantly, GuoChuang Software Co.,Ltd. (SZSE:300520) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for GuoChuang SoftwareLtd

What Is GuoChuang SoftwareLtd's Net Debt?

The image below, which you can click on for greater detail, shows that GuoChuang SoftwareLtd had debt of CN¥725.7m at the end of September 2024, a reduction from CN¥1.12b over a year. But on the other hand it also has CN¥779.1m in cash, leading to a CN¥53.4m net cash position.

How Strong Is GuoChuang SoftwareLtd's Balance Sheet?

According to the last reported balance sheet, GuoChuang SoftwareLtd had liabilities of CN¥2.16b due within 12 months, and liabilities of CN¥412.7m due beyond 12 months. Offsetting this, it had CN¥779.1m in cash and CN¥1.34b in receivables that were due within 12 months. So its liabilities total CN¥449.8m more than the combination of its cash and short-term receivables.

Given GuoChuang SoftwareLtd has a market capitalization of CN¥7.44b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, GuoChuang SoftwareLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GuoChuang SoftwareLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, GuoChuang SoftwareLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is GuoChuang SoftwareLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months GuoChuang SoftwareLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥491m and booked a CN¥493m accounting loss. But at least it has CN¥53.4m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 3 warning signs for GuoChuang SoftwareLtd (2 are a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.