Sichuan Lutianhua Company Limited By Shares (SZSE:000912) Seems To Use Debt Quite Sensibly

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.' 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, Sichuan Lutianhua Company Limited By Shares (SZSE:000912) does carry debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sichuan Lutianhua Company Limited By Shares

What Is Sichuan Lutianhua Company Limited By Shares's Net Debt?

As you can see below, Sichuan Lutianhua Company Limited By Shares had CN¥471.6m of debt at September 2024, down from CN¥566.2m a year prior. However, it does have CN¥3.99b in cash offsetting this, leading to net cash of CN¥3.52b.

How Healthy Is Sichuan Lutianhua Company Limited By Shares' Balance Sheet?

According to the last reported balance sheet, Sichuan Lutianhua Company Limited By Shares had liabilities of CN¥3.57b due within 12 months, and liabilities of CN¥492.1m due beyond 12 months. On the other hand, it had cash of CN¥3.99b and CN¥173.6m worth of receivables due within a year. So it can boast CN¥105.8m more liquid assets than total liabilities.

This state of affairs indicates that Sichuan Lutianhua Company Limited By Shares' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.39b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Sichuan Lutianhua Company Limited By Shares boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Sichuan Lutianhua Company Limited By Shares's saving grace is its low debt levels, because its EBIT has tanked 71% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan Lutianhua Company Limited By Shares will need earnings to service that debt. 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. While Sichuan Lutianhua Company Limited By Shares 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, Sichuan Lutianhua Company Limited By Shares actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Lutianhua Company Limited By Shares has CN¥3.52b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 215% of that EBIT to free cash flow, bringing in CN¥272m. So we don't have any problem with Sichuan Lutianhua Company Limited By Shares's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Sichuan Lutianhua Company Limited By Shares .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.