Is Kingdee International Software Group (HKG:268) Using Debt 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. We can see that Kingdee International Software Group Company Limited (HKG:268) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kingdee International Software Group

What Is Kingdee International Software Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Kingdee International Software Group had CN¥470.0m of debt, an increase on none, over one year. But it also has CN¥2.63b in cash to offset that, meaning it has CN¥2.16b net cash.

How Healthy Is Kingdee International Software Group's Balance Sheet?

We can see from the most recent balance sheet that Kingdee International Software Group had liabilities of CN¥3.77b falling due within a year, and liabilities of CN¥558.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.63b as well as receivables valued at CN¥907.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥781.5m.

Having regard to Kingdee International Software Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥40.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Kingdee International Software Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kingdee International Software Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kingdee International Software Group reported revenue of CN¥4.9b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Kingdee International Software Group?

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 Kingdee International Software Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥513m of cash and made a loss of CN¥389m. With only CN¥2.16b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Kingdee International Software Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.