Is Jiangsu NandaSoft Technology (HKG:8045) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiangsu NandaSoft Technology Company Limited (HKG:8045) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jiangsu NandaSoft Technology

What Is Jiangsu NandaSoft Technology's Debt?

As you can see below, Jiangsu NandaSoft Technology had CN¥278.2m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥121.0m in cash leading to net debt of about CN¥157.1m.

A Look At Jiangsu NandaSoft Technology's Liabilities

The latest balance sheet data shows that Jiangsu NandaSoft Technology had liabilities of CN¥628.7m due within a year, and liabilities of CN¥324.6m falling due after that. Offsetting these obligations, it had cash of CN¥121.0m as well as receivables valued at CN¥138.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥694.1m.

This deficit casts a shadow over the CN¥136.7m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of CN¥548m, which is a gain of 8.9%, 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.

Caveat Emptor

Importantly, Jiangsu NandaSoft Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥8.9m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥33m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Jiangsu NandaSoft Technology you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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