Here's Why Guangdong Leadyo IC Testing (SHSE:688135) Can Afford Some 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.' 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. As with many other companies Guangdong Leadyo IC Testing Co., Ltd. (SHSE:688135) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangdong Leadyo IC Testing

What Is Guangdong Leadyo IC Testing's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangdong Leadyo IC Testing had CN¥1.22b of debt, an increase on CN¥560.5m, over one year. However, it does have CN¥553.9m in cash offsetting this, leading to net debt of about CN¥662.5m.

A Look At Guangdong Leadyo IC Testing's Liabilities

We can see from the most recent balance sheet that Guangdong Leadyo IC Testing had liabilities of CN¥446.3m falling due within a year, and liabilities of CN¥1.07b due beyond that. Offsetting these obligations, it had cash of CN¥553.9m as well as receivables valued at CN¥156.4m due within 12 months. So its liabilities total CN¥809.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Guangdong Leadyo IC Testing has a market capitalization of CN¥3.91b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Leadyo IC Testing'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 Guangdong Leadyo IC Testing's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Guangdong Leadyo IC Testing produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥12m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥255m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 2 warning signs for Guangdong Leadyo IC Testing that you should be aware of.

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.