Does Leon Technology (SZSE:300603) Have A Healthy Balance Sheet?

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. We can see that Leon Technology Co., Ltd. (SZSE:300603) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Leon Technology's Debt?

As you can see below, Leon Technology had CN¥137.4m of debt at September 2024, down from CN¥224.6m a year prior. But it also has CN¥409.9m in cash to offset that, meaning it has CN¥272.5m net cash.

How Healthy Is Leon Technology's Balance Sheet?

According to the last reported balance sheet, Leon Technology had liabilities of CN¥728.4m due within 12 months, and liabilities of CN¥36.4m due beyond 12 months. Offsetting this, it had CN¥409.9m in cash and CN¥699.1m in receivables that were due within 12 months. So it can boast CN¥344.2m more liquid assets than total liabilities.

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

See our latest analysis for Leon Technology

Although Leon Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥36m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Leon Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Leon Technology 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 year, Leon Technology 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 Leon Technology has net cash of CN¥272.5m, as well as more liquid assets than liabilities. So we don't have any problem with Leon Technology's use of debt. 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. For instance, we've identified 2 warning signs for Leon Technology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.