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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kingdee International Software Group Company Limited (HKG:268) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Kingdee International Software Group had debt of CN¥50.0m, up from none in one year. However, it does have CN¥1.98b in cash offsetting this, leading to net cash of CN¥1.93b.

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

According to the last reported balance sheet, Kingdee International Software Group had liabilities of CN¥3.29b due within 12 months, and liabilities of CN¥178.7m due beyond 12 months. Offsetting this, it had CN¥1.98b in cash and CN¥1.03b in receivables that were due within 12 months. So its liabilities total CN¥458.4m more than the combination of its cash and short-term receivables.

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¥43.6b 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kingdee International Software Group reported revenue of CN¥4.5b, which is a gain of 17%, although it did not report any earnings before interest and tax. 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¥147m and booked a CN¥411m accounting loss. With only CN¥1.93b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Kingdee International Software Group insider transactions.

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.