Is LUSTER LightTech (SHSE:688400) Using Debt Sensibly?

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.' 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 note that LUSTER LightTech Co., LTD. (SHSE:688400) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for LUSTER LightTech

What Is LUSTER LightTech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 LUSTER LightTech had debt of CN¥106.8m, up from CN¥40.0m in one year. However, it does have CN¥2.08b in cash offsetting this, leading to net cash of CN¥1.97b.

How Strong Is LUSTER LightTech's Balance Sheet?

We can see from the most recent balance sheet that LUSTER LightTech had liabilities of CN¥738.7m falling due within a year, and liabilities of CN¥290.4m due beyond that. Offsetting these obligations, it had cash of CN¥2.08b as well as receivables valued at CN¥1.14b due within 12 months. So it can boast CN¥2.19b more liquid assets than total liabilities.

This excess liquidity suggests that LUSTER LightTech is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that LUSTER LightTech has more cash than debt is arguably a good indication that it can manage its debt safely. 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 LUSTER LightTech 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.

In the last year LUSTER LightTech had a loss before interest and tax, and actually shrunk its revenue by 8.7%, to CN¥2.5b. We would much prefer see growth.

So How Risky Is LUSTER LightTech?

While LUSTER LightTech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥147m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for LUSTER LightTech you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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