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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Jiangsu NandaSoft Technology Company Limited (HKG:8045) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu NandaSoft Technology had CN¥281.4m in debt in June 2021; about the same as the year before. On the flip side, it has CN¥121.0m in cash leading to net debt of about CN¥160.4m.

How Strong Is Jiangsu NandaSoft Technology's Balance Sheet?

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 this, it had CN¥121.0m in cash and CN¥138.1m in receivables that were due within 12 months. So its liabilities total CN¥694.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥99.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jiangsu NandaSoft Technology would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu NandaSoft Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jiangsu NandaSoft Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Jiangsu NandaSoft Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥4.1m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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¥32m in the last year. So we think buying this stock is risky. 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. Be aware that Jiangsu NandaSoft Technology is showing 2 warning signs in our investment analysis , you should know about...

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.