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. Importantly, Zwsoft Co.,Ltd. (SHSE:688083) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does ZwsoftLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 ZwsoftLtd had CN¥15.0m of debt, an increase on none, over one year. But it also has CN¥1.99b in cash to offset that, meaning it has CN¥1.97b net cash.

How Strong Is ZwsoftLtd's Balance Sheet?

The latest balance sheet data shows that ZwsoftLtd had liabilities of CN¥313.8m due within a year, and liabilities of CN¥107.5m falling due after that. On the other hand, it had cash of CN¥1.99b and CN¥156.5m worth of receivables due within a year. So it can boast CN¥1.72b more liquid assets than total liabilities.

This surplus suggests that ZwsoftLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ZwsoftLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ZwsoftLtd 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 ZwsoftLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥832m. With any luck the company will be able to grow its way to profitability.

So How Risky Is ZwsoftLtd?

While ZwsoftLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥53m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 32% is a good sign. We'd see further strong growth as an optimistic indication. 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 ZwsoftLtd is showing 1 warning sign in our investment analysis , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com