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, Lecron Industrial Development Group Co., Ltd. (SZSE:300343) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lecron Industrial Development Group

How Much Debt Does Lecron Industrial Development Group Carry?

The image below, which you can click on for greater detail, shows that Lecron Industrial Development Group had debt of CN¥132.3m at the end of December 2021, a reduction from CN¥420.9m over a year. But it also has CN¥295.7m in cash to offset that, meaning it has CN¥163.4m net cash.

A Look At Lecron Industrial Development Group's Liabilities

We can see from the most recent balance sheet that Lecron Industrial Development Group had liabilities of CN¥511.6m falling due within a year, and liabilities of CN¥285.2m due beyond that. Offsetting these obligations, it had cash of CN¥295.7m as well as receivables valued at CN¥419.5m due within 12 months. So its liabilities total CN¥81.5m more than the combination of its cash and short-term receivables.

Having regard to Lecron Industrial Development Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥13.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Lecron Industrial Development Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Lecron Industrial Development Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥470m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lecron Industrial Development Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lecron Industrial Development Group 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 year, Lecron Industrial Development Group produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Lecron Industrial Development Group has CN¥163.4m in net cash. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in CN¥340m. So is Lecron Industrial Development Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Lecron Industrial Development Group 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.