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. We note that Kingdee International Software Group Company Limited (HKG:268) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kingdee International Software Group

How Much Debt Does Kingdee International Software Group Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Kingdee International Software Group had debt of CN¥776.9m, up from CN¥470.0m in one year. However, its balance sheet shows it holds CN¥4.05b in cash, so it actually has CN¥3.28b net cash.

A Look At Kingdee International Software Group’s Liabilities

We can see from the most recent balance sheet that Kingdee International Software Group had liabilities of CN¥4.53b falling due within a year, and liabilities of CN¥907.8m due beyond that. Offsetting this, it had CN¥4.05b in cash and CN¥958.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥426.8m.

This state of affairs indicates that Kingdee International Software Group’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the CN¥26.6b company is struggling for cash, we still think it’s worth monitoring its 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn’t profitable at an EBIT level, but managed to grow its revenue by 17%, to CN¥5.7b. 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?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Kingdee International Software Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥243m of cash and made a loss of CN¥210m. While this does make the company a bit risky, it’s important to remember it has net cash of CN¥3.28b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. 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. Be aware that Kingdee International Software Group is showing 1 warning sign 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.