David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Hoperun Software Co., Ltd. (SZSE:300339) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Jiangsu Hoperun Software
What Is Jiangsu Hoperun Software's Debt?
You can click the graphic below for the historical numbers, but it shows that Jiangsu Hoperun Software had CN¥772.3m of debt in September 2023, down from CN¥876.8m, one year before. However, because it has a cash reserve of CN¥467.7m, its net debt is less, at about CN¥304.6m.
A Look At Jiangsu Hoperun Software's Liabilities
We can see from the most recent balance sheet that Jiangsu Hoperun Software had liabilities of CN¥1.10b falling due within a year, and liabilities of CN¥469.6m due beyond that. Offsetting this, it had CN¥467.7m in cash and CN¥1.72b in receivables that were due within 12 months. So it can boast CN¥622.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Jiangsu Hoperun Software could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Jiangsu Hoperun Software has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Hoperun Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Jiangsu Hoperun Software made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 3.1%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Jiangsu Hoperun Software produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥3.4m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And the cherry on top is that its actual free cash flow was CN¥6.6m with statutory profit coming in at CN¥82m. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Hoperun Software (of which 1 is a bit unpleasant!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.