Does Sinosoft Technology Group (HKG:1297) Have A Healthy Balance Sheet?

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. As with many other companies Sinosoft Technology Group Limited (HKG:1297) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sinosoft Technology Group

How Much Debt Does Sinosoft Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that Sinosoft Technology Group had CN¥20.0m of debt in June 2022, down from CN¥70.0m, one year before. However, it does have CN¥103.2m in cash offsetting this, leading to net cash of CN¥83.2m.

A Look At Sinosoft Technology Group's Liabilities

The latest balance sheet data shows that Sinosoft Technology Group had liabilities of CN¥163.0m due within a year, and liabilities of CN¥82.9m falling due after that. Offsetting this, it had CN¥103.2m in cash and CN¥1.31b in receivables that were due within 12 months. So it can boast CN¥1.17b more liquid assets than total liabilities.

This surplus liquidity suggests that Sinosoft Technology Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sinosoft Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sinosoft Technology Group has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sinosoft Technology Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sinosoft Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sinosoft Technology Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sinosoft Technology Group has CN¥83.2m in net cash and a strong balance sheet. And it impressed us with its EBIT growth of 34% over the last year. So is Sinosoft Technology Group's debt a risk? It doesn't seem so to us. 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. For example Sinosoft Technology Group has 4 warning signs (and 1 which is concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.