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. We note that Lecron Industrial Development Group Co., Ltd. (SZSE:300343) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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

What Is Lecron Industrial Development Group's Debt?

As you can see below, at the end of June 2022, Lecron Industrial Development Group had CN¥198.8m of debt, up from CN¥163.2m a year ago. Click the image for more detail. However, it does have CN¥744.9m in cash offsetting this, leading to net cash of CN¥546.1m.

How Healthy Is Lecron Industrial Development Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lecron Industrial Development Group had liabilities of CN¥705.1m due within 12 months and liabilities of CN¥81.9m due beyond that. Offsetting these obligations, it had cash of CN¥744.9m as well as receivables valued at CN¥558.6m due within 12 months. So it actually has CN¥516.4m more liquid assets than total liabilities.

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

Better yet, Lecron Industrial Development Group grew its EBIT by 1,203% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lecron Industrial Development Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 two years, Lecron Industrial Development Group produced sturdy free cash flow equating to 58% 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 we empathize with investors who find debt concerning, you should keep in mind that Lecron Industrial Development Group has net cash of CN¥546.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 1,203% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Lecron Industrial Development Group (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.