These 4 Measures Indicate That Leedarson IoT Technology (SHSE:605365) Is Using Debt Safely

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. We can see that Leedarson IoT Technology Inc. (SHSE:605365) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Leedarson IoT Technology

What Is Leedarson IoT Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Leedarson IoT Technology had debt of CN¥419.6m, up from CN¥208.1m in one year. However, its balance sheet shows it holds CN¥1.62b in cash, so it actually has CN¥1.20b net cash.

How Healthy Is Leedarson IoT Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Leedarson IoT Technology had liabilities of CN¥2.49b due within 12 months and liabilities of CN¥343.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.62b as well as receivables valued at CN¥1.43b due within 12 months. So it actually has CN¥207.8m more liquid assets than total liabilities.

This surplus suggests that Leedarson IoT Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Leedarson IoT Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Leedarson IoT Technology has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Leedarson IoT Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Leedarson IoT Technology 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 three years, Leedarson IoT Technology produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. 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 Leedarson IoT Technology has CN¥1.20b in net cash and a decent-looking balance sheet. And we liked the look of last year's 59% year-on-year EBIT growth. So we don't think Leedarson IoT Technology's use of debt is risky. 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. Be aware that Leedarson IoT Technology is showing 1 warning sign in our investment analysis , 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.