Is Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Shaanxi Lighte Optoelectronics Material Co.,Ltd (SHSE:688150) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shaanxi Lighte Optoelectronics MaterialLtd

What Is Shaanxi Lighte Optoelectronics MaterialLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shaanxi Lighte Optoelectronics MaterialLtd had debt of CN¥136.2m, up from CN¥100.7m in one year. But it also has CN¥912.7m in cash to offset that, meaning it has CN¥776.5m net cash.

How Strong Is Shaanxi Lighte Optoelectronics MaterialLtd's Balance Sheet?

The latest balance sheet data shows that Shaanxi Lighte Optoelectronics MaterialLtd had liabilities of CN¥103.8m due within a year, and liabilities of CN¥145.4m falling due after that. Offsetting these obligations, it had cash of CN¥912.7m as well as receivables valued at CN¥141.9m due within 12 months. So it actually has CN¥805.3m more liquid assets than total liabilities.

This surplus suggests that Shaanxi Lighte Optoelectronics MaterialLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shaanxi Lighte Optoelectronics MaterialLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Shaanxi Lighte Optoelectronics MaterialLtd grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shaanxi Lighte Optoelectronics MaterialLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shaanxi Lighte Optoelectronics MaterialLtd 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 last three years, Shaanxi Lighte Optoelectronics MaterialLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shaanxi Lighte Optoelectronics MaterialLtd has net cash of CN¥776.5m, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.6% over the last year. So we don't have any problem with Shaanxi Lighte Optoelectronics MaterialLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shaanxi Lighte Optoelectronics MaterialLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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