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 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. As with many other companies Lecron Industrial Development Group Co., Ltd. (SZSE:300343) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Lecron Industrial Development Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Lecron Industrial Development Group had CN¥255.7m of debt in December 2023, down from CN¥362.4m, one year before. But it also has CN¥1.21b in cash to offset that, meaning it has CN¥950.4m net cash.
How Strong Is Lecron Industrial Development Group's Balance Sheet?
According to the last reported balance sheet, Lecron Industrial Development Group had liabilities of CN¥842.7m due within 12 months, and liabilities of CN¥46.3m due beyond 12 months. On the other hand, it had cash of CN¥1.21b and CN¥469.2m worth of receivables due within a year. So it can boast CN¥786.3m 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. 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.
Over 12 months, Lecron Industrial Development Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.0b, which is a fall of 50%. To be frank that doesn't bode well.
So How Risky Is Lecron Industrial Development Group?
While Lecron Industrial Development Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥13m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Lecron Industrial Development Group has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.