We Think Leon Technology (SZSE:300603) Can Stay On Top Of Its 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Leon Technology Co., Ltd. (SZSE:300603) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 Leon Technology

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. However, it does have CN¥409.9m in cash offsetting this, leading to net cash of CN¥272.5m.

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. On the other hand, it had cash of CN¥409.9m and CN¥699.1m worth of receivables due within a year. So it can boast CN¥344.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Leon Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Leon Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Leon Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. During the last year, Leon Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Leon Technology has CN¥272.5m in net cash and a decent-looking balance sheet. So we are not troubled with Leon Technology's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Leon Technology .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.