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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanghai Baosight Software Co.,Ltd. (SHSE:600845) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Baosight SoftwareLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Baosight SoftwareLtd had CN¥64.0m of debt in September 2024, down from CN¥98.1m, one year before. But it also has CN¥4.99b in cash to offset that, meaning it has CN¥4.93b net cash.

How Healthy Is Shanghai Baosight SoftwareLtd's Balance Sheet?

The latest balance sheet data shows that Shanghai Baosight SoftwareLtd had liabilities of CN¥8.55b due within a year, and liabilities of CN¥956.2m falling due after that. On the other hand, it had cash of CN¥4.99b and CN¥8.05b worth of receivables due within a year. So it can boast CN¥3.53b more liquid assets than total liabilities.

This surplus suggests that Shanghai Baosight SoftwareLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Baosight SoftwareLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Shanghai Baosight SoftwareLtd grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai Baosight SoftwareLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Baosight SoftwareLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Shanghai Baosight SoftwareLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Baosight SoftwareLtd has net cash of CN¥4.93b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥2.3b. So we don't think Shanghai Baosight SoftwareLtd's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Baosight SoftwareLtd .

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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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.