Lucky Harvest (SZSE:002965) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Lucky Harvest Co., Ltd. (SZSE:002965) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Lucky Harvest

How Much Debt Does Lucky Harvest Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Lucky Harvest had debt of CN¥116.6m, up from CN¥84.6m in one year. But on the other hand it also has CN¥1.28b in cash, leading to a CN¥1.17b net cash position.

A Look At Lucky Harvest's Liabilities

According to the last reported balance sheet, Lucky Harvest had liabilities of CN¥3.19b due within 12 months, and liabilities of CN¥95.0m due beyond 12 months. Offsetting this, it had CN¥1.28b in cash and CN¥2.23b in receivables that were due within 12 months. So it actually has CN¥232.3m more liquid assets than total liabilities.

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

And we also note warmly that Lucky Harvest grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lucky Harvest can strengthen its balance sheet over time. 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. Lucky Harvest may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lucky Harvest burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lucky Harvest has net cash of CN¥1.17b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with Lucky Harvest's use of debt. 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. We've identified 2 warning signs with Lucky Harvest , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.