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.' 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, Fujian Boss Software Corp. (SZSE:300525) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fujian Boss Software Carry?

As you can see below, at the end of March 2024, Fujian Boss Software had CN¥199.6m of debt, up from CN¥93.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.40b in cash, so it actually has CN¥1.20b net cash.

A Look At Fujian Boss Software's Liabilities

Zooming in on the latest balance sheet data, we can see that Fujian Boss Software had liabilities of CN¥592.4m due within 12 months and liabilities of CN¥363.4m due beyond that. On the other hand, it had cash of CN¥1.40b and CN¥995.9m worth of receivables due within a year. So it actually has CN¥1.44b more liquid assets than total liabilities.

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

Also positive, Fujian Boss Software grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fujian Boss Software's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fujian Boss Software 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. Looking at the most recent three years, Fujian Boss Software recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Boss Software has net cash of CN¥1.20b, as well as more liquid assets than liabilities. And we liked the look of last year's 30% year-on-year EBIT growth. So we don't think Fujian Boss Software's use of debt is risky. 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. For instance, we've identified 2 warning signs for Fujian Boss Software that you should be aware of.

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.