Is Kingdee International Software Group (HKG:268) Using Debt Sensibly?

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.' 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, Kingdee International Software Group Company Limited (HKG:268) does carry debt. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kingdee International Software Group

How Much Debt Does Kingdee International Software Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Kingdee International Software Group had CN¥707.5m of debt, an increase on CN¥50.0m, over one year. However, it does have CN¥2.06b in cash offsetting this, leading to net cash of CN¥1.35b.

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

According to the last reported balance sheet, Kingdee International Software Group had liabilities of CN¥3.88b due within 12 months, and liabilities of CN¥748.8m due beyond 12 months. On the other hand, it had cash of CN¥2.06b and CN¥957.5m worth of receivables due within a year. So it has liabilities totalling CN¥1.62b more than its cash and near-term receivables, combined.

Given Kingdee International Software Group has a market capitalization of CN¥40.1b, 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, Kingdee International Software Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Kingdee International Software Group wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥5.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Kingdee International Software Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Kingdee International Software Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥666m and booked a CN¥316m accounting loss. Given it only has net cash of CN¥1.35b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Kingdee International Software Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.