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. 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.
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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Lecron Industrial Development Group
What Is Lecron Industrial Development Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Lecron Industrial Development Group had CN¥216.6m of debt, an increase on CN¥168.3m, over one year. However, its balance sheet shows it holds CN¥1.05b in cash, so it actually has CN¥833.0m net cash.
How Healthy Is Lecron Industrial Development Group's Balance Sheet?
According to the last reported balance sheet, Lecron Industrial Development Group had liabilities of CN¥818.9m due within 12 months, and liabilities of CN¥108.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥626.8m due within 12 months. So it actually has CN¥748.5m 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!
Even more impressive was the fact that Lecron Industrial Development Group grew its EBIT by 395% over twelve months. 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 future earnings, more than anything, that will determine Lecron Industrial Development Group'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 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. Over the most recent two years, Lecron Industrial Development Group recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While it is always sensible to investigate a company's debt, in this case Lecron Industrial Development Group has CN¥833.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 395% over the last year. So we don't think Lecron Industrial Development Group'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lecron Industrial Development Group you should know about.
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.
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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.