Here's Why Lander Sports Development (SZSE:000558) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Lander Sports Development Co., Ltd. (SZSE:000558) does have debt on its balance sheet. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lander Sports Development

What Is Lander Sports Development's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Lander Sports Development had CN¥529.5m of debt, an increase on CN¥442.6m, over one year. On the flip side, it has CN¥216.1m in cash leading to net debt of about CN¥313.4m.

How Healthy Is Lander Sports Development's Balance Sheet?

According to the last reported balance sheet, Lander Sports Development had liabilities of CN¥350.4m due within 12 months, and liabilities of CN¥468.7m due beyond 12 months. On the other hand, it had cash of CN¥216.1m and CN¥85.1m worth of receivables due within a year. So its liabilities total CN¥517.9m more than the combination of its cash and short-term receivables.

Given Lander Sports Development has a market capitalization of CN¥4.68b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lander Sports Development'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.

In the last year Lander Sports Development had a loss before interest and tax, and actually shrunk its revenue by 58%, to CN¥176m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Lander Sports Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥135m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that Lander Sports Development is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.