Here's Why Leader Harmonious Drive Systems (SHSE:688017) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Leader Harmonious Drive Systems Co., Ltd. (SHSE:688017) makes use of debt. But the more important question is: how much risk is that debt creating?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Leader Harmonious Drive Systems

What Is Leader Harmonious Drive Systems's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Leader Harmonious Drive Systems had debt of CN¥614.5m, up from CN¥308.7m in one year. However, its balance sheet shows it holds CN¥1.22b in cash, so it actually has CN¥605.5m net cash.

A Look At Leader Harmonious Drive Systems' Liabilities

The latest balance sheet data shows that Leader Harmonious Drive Systems had liabilities of CN¥651.7m due within a year, and liabilities of CN¥192.7m falling due after that. Offsetting this, it had CN¥1.22b in cash and CN¥144.1m in receivables that were due within 12 months. So it actually has CN¥519.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Leader Harmonious Drive Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Leader Harmonious Drive Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Leader Harmonious Drive Systems if management cannot prevent a repeat of the 55% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Leader Harmonious Drive Systems'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Leader Harmonious Drive Systems 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, Leader Harmonious Drive Systems burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Leader Harmonious Drive Systems has net cash of CN¥605.5m, as well as more liquid assets than liabilities. So while Leader Harmonious Drive Systems does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Leader Harmonious Drive Systems has 2 warning signs we think you should be aware of.

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.

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