Is Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) Using Too Much Debt?

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, Shaanxi Lighte Optoelectronics Material Co.,Ltd (SHSE:688150) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shaanxi Lighte Optoelectronics MaterialLtd

What Is Shaanxi Lighte Optoelectronics MaterialLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shaanxi Lighte Optoelectronics MaterialLtd had CN¥169.3m of debt, an increase on CN¥100.1m, over one year. But on the other hand it also has CN¥989.7m in cash, leading to a CN¥820.5m net cash position.

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

Zooming in on the latest balance sheet data, we can see that Shaanxi Lighte Optoelectronics MaterialLtd had liabilities of CN¥138.2m due within 12 months and liabilities of CN¥146.6m due beyond that. Offsetting this, it had CN¥989.7m in cash and CN¥141.5m in receivables that were due within 12 months. So it can boast CN¥846.4m 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. Succinctly put, Shaanxi Lighte Optoelectronics MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shaanxi Lighte Optoelectronics MaterialLtd grew its EBIT by 100% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 reported free cash flow worth 9.5% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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¥820.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 100% year-on-year EBIT growth. So we don't think Shaanxi Lighte Optoelectronics MaterialLtd's use of debt is risky. 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. Be aware that Shaanxi Lighte Optoelectronics MaterialLtd 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.