Is LianChuang Electronic TechnologyLtd (SZSE:002036) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies LianChuang Electronic Technology Co.,Ltd (SZSE:002036) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for LianChuang Electronic TechnologyLtd

What Is LianChuang Electronic TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, LianChuang Electronic TechnologyLtd had CN¥8.71b of debt, up from CN¥7.68b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥2.26b, its net debt is less, at about CN¥6.44b.

How Healthy Is LianChuang Electronic TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that LianChuang Electronic TechnologyLtd had liabilities of CN¥8.60b falling due within a year, and liabilities of CN¥4.09b due beyond that. Offsetting this, it had CN¥2.26b in cash and CN¥3.31b in receivables that were due within 12 months. So its liabilities total CN¥7.11b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥7.72b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LianChuang Electronic TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, LianChuang Electronic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥10b, which is a fall of 4.9%. We would much prefer see growth.

Caveat Emptor

Importantly, LianChuang Electronic TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥698m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.6b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 LianChuang Electronic TechnologyLtd .

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.

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