The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Lecron Industrial Development Group Co., Ltd. (SZSE:300343) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Lecron Industrial Development Group
What Is Lecron Industrial Development Group's Debt?
As you can see below, Lecron Industrial Development Group had CN¥172.4m of debt at September 2023, down from CN¥216.6m a year prior. But it also has CN¥1.23b in cash to offset that, meaning it has CN¥1.06b net cash.
How Strong 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¥912.0m due within 12 months and liabilities of CN¥55.9m due beyond that. On the other hand, it had cash of CN¥1.23b and CN¥374.8m worth of receivables due within a year. So it actually has CN¥636.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Lecron Industrial Development Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lecron Industrial Development Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lecron Industrial Development Group's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Lecron Industrial Development Group had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥1.0b. That makes us nervous, to say the least.
So How Risky Is Lecron Industrial Development Group?
Although Lecron Industrial Development Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥202m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Lecron Industrial Development Group's profit, revenue, and operating cashflow have changed over the last few years.
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.
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.