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.' 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 LianChuang Electronic Technology Co.,Ltd (SZSE:002036) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for LianChuang Electronic TechnologyLtd

What Is LianChuang Electronic TechnologyLtd's Net Debt?

As you can see below, LianChuang Electronic TechnologyLtd had CN¥7.44b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥1.56b, its net debt is less, at about CN¥5.88b.

A Look At LianChuang Electronic TechnologyLtd's Liabilities

We can see from the most recent balance sheet that LianChuang Electronic TechnologyLtd had liabilities of CN¥8.75b falling due within a year, and liabilities of CN¥4.26b due beyond that. Offsetting these obligations, it had cash of CN¥1.56b as well as receivables valued at CN¥2.88b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.57b.

This deficit is considerable relative to its market capitalization of CN¥10.7b, so it does suggest shareholders should keep an eye on LianChuang Electronic TechnologyLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 LianChuang Electronic TechnologyLtd 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 LianChuang Electronic TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥11b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months LianChuang Electronic TechnologyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥556m. 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. However, it doesn't help that it burned through CN¥1.3b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for LianChuang Electronic TechnologyLtd that you should be aware of before investing here.

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.