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.' 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. We note that Thunder Software Technology Co.,Ltd. (SZSE:300496) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Thunder Software TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Thunder Software TechnologyLtd had debt of CN¥14.9m at the end of September 2024, a reduction from CN¥69.5m over a year. But on the other hand it also has CN¥3.21b in cash, leading to a CN¥3.20b net cash position.

How Strong Is Thunder Software TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Thunder Software TechnologyLtd had liabilities of CN¥1.48b due within 12 months, and liabilities of CN¥125.1m due beyond 12 months. Offsetting this, it had CN¥3.21b in cash and CN¥1.87b in receivables that were due within 12 months. So it can boast CN¥3.47b more liquid assets than total liabilities.

This short term liquidity is a sign that Thunder Software TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Thunder Software TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Thunder Software TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Thunder Software TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 7.5%, to CN¥5.1b. We would much prefer see growth.

So How Risky Is Thunder Software TechnologyLtd?

While Thunder Software TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥12m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for Thunder Software TechnologyLtd you should be aware of.

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.

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