Fujian Boss Software (SZSE:300525) Seems To Use Debt Quite Sensibly

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. As with many other companies Fujian Boss Software Corp. (SZSE:300525) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fujian Boss Software

How Much Debt Does Fujian Boss Software Carry?

As you can see below, at the end of September 2023, Fujian Boss Software had CN¥218.0m of debt, up from CN¥124.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.15b in cash, leading to a CN¥929.2m net cash position.

How Strong Is Fujian Boss Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fujian Boss Software had liabilities of CN¥562.2m due within 12 months and liabilities of CN¥260.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.15b as well as receivables valued at CN¥1.14b due within 12 months. So it actually has CN¥1.46b more liquid assets than total liabilities.

This short term liquidity is a sign that Fujian Boss Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fujian Boss Software has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Fujian Boss Software saw its EBIT decline by 2.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fujian Boss Software 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 Fujian Boss Software 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. Looking at the most recent three years, Fujian Boss Software recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Boss Software has net cash of CN¥929.2m, as well as more liquid assets than liabilities. So we are not troubled with Fujian Boss Software's debt use. 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 instance, we've identified 2 warning signs for Fujian Boss Software (1 is significant) 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.