Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Great Chinasoft Technology Co.,Ltd. (SZSE:002453) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Great Chinasoft TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Great Chinasoft TechnologyLtd had debt of CN¥233.7m at the end of September 2024, a reduction from CN¥280.9m over a year. However, it does have CN¥351.8m in cash offsetting this, leading to net cash of CN¥118.2m.

How Strong Is Great Chinasoft TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Great Chinasoft TechnologyLtd had liabilities of CN¥659.5m due within 12 months, and liabilities of CN¥22.6m due beyond 12 months. Offsetting this, it had CN¥351.8m in cash and CN¥398.8m in receivables that were due within 12 months. So it actually has CN¥68.5m more liquid assets than total liabilities.

Having regard to Great Chinasoft TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.42b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Great Chinasoft TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Great Chinasoft TechnologyLtd will need earnings to service that debt. 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, Great Chinasoft TechnologyLtd reported revenue of CN¥581m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Great Chinasoft TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Great Chinasoft TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥117m of cash and made a loss of CN¥413m. But the saving grace is the CN¥118.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Great Chinasoft TechnologyLtd (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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