Does Longmaster Information & Technology (SZSE:300288) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Longmaster Information & Technology Co., Ltd. (SZSE:300288) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Longmaster Information & Technology

What Is Longmaster Information & Technology's Debt?

The image below, which you can click on for greater detail, shows that Longmaster Information & Technology had debt of CN¥20.7m at the end of September 2024, a reduction from CN¥37.2m over a year. But on the other hand it also has CN¥278.5m in cash, leading to a CN¥257.9m net cash position.

A Look At Longmaster Information & Technology's Liabilities

According to the last reported balance sheet, Longmaster Information & Technology had liabilities of CN¥208.3m due within 12 months, and liabilities of CN¥34.7m due beyond 12 months. Offsetting this, it had CN¥278.5m in cash and CN¥86.1m in receivables that were due within 12 months. So it can boast CN¥121.6m more liquid assets than total liabilities.

Having regard to Longmaster Information & Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Longmaster Information & Technology 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 Longmaster Information & Technology if management cannot prevent a repeat of the 25% cut to EBIT 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 it is Longmaster Information & Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Longmaster Information & Technology 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. Over the most recent three years, Longmaster Information & Technology recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Longmaster Information & Technology has net cash of CN¥257.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥33m, being 76% of its EBIT. So we are not troubled with Longmaster Information & Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Longmaster Information & Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.