Is Jiangsu NandaSoft Technology (HKG:8045) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jiangsu NandaSoft Technology Company Limited (HKG:8045) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu NandaSoft Technology

What Is Jiangsu NandaSoft Technology's Debt?

The image below, which you can click on for greater detail, shows that Jiangsu NandaSoft Technology had debt of CN¥198.4m at the end of June 2023, a reduction from CN¥297.8m over a year. On the flip side, it has CN¥33.9m in cash leading to net debt of about CN¥164.5m.

How Strong Is Jiangsu NandaSoft Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu NandaSoft Technology had liabilities of CN¥648.2m due within 12 months and liabilities of CN¥240.4m due beyond that. Offsetting these obligations, it had cash of CN¥33.9m as well as receivables valued at CN¥148.4m due within 12 months. So it has liabilities totalling CN¥706.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥42.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Jiangsu NandaSoft Technology would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu NandaSoft Technology 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.

Over 12 months, Jiangsu NandaSoft Technology made a loss at the EBIT level, and saw its revenue drop to CN¥202m, which is a fall of 55%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Jiangsu NandaSoft Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥7.3m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥19m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jiangsu NandaSoft Technology has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.