Is Kingdee International Software Group (HKG:268) Weighed On By Its Debt Load?

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 note that Kingdee International Software Group Company Limited (HKG:268) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kingdee International Software Group

What Is Kingdee International Software Group's Debt?

The image below, which you can click on for greater detail, shows that Kingdee International Software Group had debt of CN¥120.0m at the end of December 2020, a reduction from CN¥199.6m over a year. But on the other hand it also has CN¥4.98b in cash, leading to a CN¥4.86b net cash position.

How Strong 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¥2.60b falling due within a year, and liabilities of CN¥165.0m due beyond that. Offsetting these obligations, it had cash of CN¥4.98b as well as receivables valued at CN¥1.01b due within 12 months. So it can boast CN¥3.23b more liquid assets than total liabilities.

This short term liquidity is a sign that Kingdee International Software Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 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 ultimately the future profitability of the business will decide if Kingdee International Software Group can strengthen its balance sheet over time. 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Kingdee International Software Group?

Although Kingdee International Software Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥120m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 2 warning signs we've spotted with Kingdee International Software Group .

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.

If you’re looking to trade Kingdee International Software Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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