These 4 Measures Indicate That Ligao FoodsLtd (SZSE:300973) Is Using Debt Extensively

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.' 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. Importantly, Ligao Foods Co.,Ltd. (SZSE:300973) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ligao FoodsLtd

How Much Debt Does Ligao FoodsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ligao FoodsLtd had CN¥1.00b of debt, an increase on CN¥830.3m, over one year. But it also has CN¥1.09b in cash to offset that, meaning it has CN¥85.8m net cash.

A Look At Ligao FoodsLtd's Liabilities

According to the last reported balance sheet, Ligao FoodsLtd had liabilities of CN¥609.5m due within 12 months, and liabilities of CN¥871.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥333.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥59.2m.

Having regard to Ligao FoodsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.37b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ligao FoodsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Ligao FoodsLtd's load is not too heavy, because its EBIT was down 44% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ligao FoodsLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ligao FoodsLtd 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. Over the last three years, Ligao FoodsLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Ligao FoodsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥85.8m. So although we see some areas for improvement, we're not too worried about Ligao FoodsLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ligao FoodsLtd (of which 1 is potentially serious!) you should know about.

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.

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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.