Is Longmaster Information & Technology (SZSE:300288) Using Too Much Debt?

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.' 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. We note that Longmaster Information & Technology Co., Ltd. (SZSE:300288) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Longmaster Information & Technology

What Is Longmaster Information & Technology's Net Debt?

As you can see below, Longmaster Information & Technology had CN¥37.2m of debt at September 2023, down from CN¥41.2m a year prior. However, its balance sheet shows it holds CN¥375.6m in cash, so it actually has CN¥338.5m net cash.

How Healthy Is Longmaster Information & Technology's Balance Sheet?

According to the last reported balance sheet, Longmaster Information & Technology had liabilities of CN¥292.8m due within 12 months, and liabilities of CN¥55.7m due beyond 12 months. On the other hand, it had cash of CN¥375.6m and CN¥73.9m worth of receivables due within a year. So it actually has CN¥101.0m more liquid assets than total liabilities.

This state of affairs indicates that Longmaster Information & Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.56b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Longmaster Information & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Longmaster Information & Technology grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Longmaster Information & Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Longmaster Information & 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. Happily for any shareholders, Longmaster Information & Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥338.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥79m, being 118% of its EBIT. So is Longmaster Information & Technology's debt a risk? It doesn't seem so to us. 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, we've discovered 2 warning signs for Longmaster Information & Technology (1 is concerning!) that you should be aware of before investing here.

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.