These 4 Measures Indicate That LUSTER LightTech (SHSE:688400) Is Using Debt Reasonably Well

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 LUSTER LightTech Co., LTD. (SHSE:688400) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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.

View our latest analysis for LUSTER LightTech

What Is LUSTER LightTech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 LUSTER LightTech had CN¥155.9m of debt, an increase on none, over one year. But it also has CN¥1.96b in cash to offset that, meaning it has CN¥1.81b net cash.

How Healthy Is LUSTER LightTech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LUSTER LightTech had liabilities of CN¥731.4m due within 12 months and liabilities of CN¥280.3m due beyond that. On the other hand, it had cash of CN¥1.96b and CN¥1.22b worth of receivables due within a year. So it can boast CN¥2.17b more liquid assets than total liabilities.

This excess liquidity suggests that LUSTER LightTech is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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.

In fact LUSTER LightTech's saving grace is its low debt levels, because its EBIT has tanked 85% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. LUSTER LightTech 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 three years, LUSTER LightTech 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 we empathize with investors who find debt concerning, you should keep in mind that LUSTER LightTech has net cash of CN¥1.81b, as well as more liquid assets than liabilities. So we don't have any problem with LUSTER LightTech'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. Be aware that LUSTER LightTech is showing 1 warning sign in our investment analysis , you should know about...

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.