Is Sinosoft Technology Group (HKG:1297) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sinosoft Technology Group Limited (HKG:1297) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Sinosoft Technology Group

What Is Sinosoft Technology Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Sinosoft Technology Group had debt of CN¥89.3m, up from CN¥20.0m in one year. However, its balance sheet shows it holds CN¥219.2m in cash, so it actually has CN¥129.9m net cash.

How Strong Is Sinosoft Technology Group's Balance Sheet?

The latest balance sheet data shows that Sinosoft Technology Group had liabilities of CN¥249.4m due within a year, and liabilities of CN¥84.2m falling due after that. On the other hand, it had cash of CN¥219.2m and CN¥1.18b worth of receivables due within a year. So it can boast CN¥1.07b more liquid assets than total liabilities.

This luscious liquidity implies that Sinosoft Technology Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sinosoft Technology Group 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 you can't view debt in total isolation; since Sinosoft Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sinosoft Technology Group had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥512m. We would much prefer see growth.

So How Risky Is Sinosoft Technology Group?

While Sinosoft Technology Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥33m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Sinosoft Technology Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.