Here's Why Luenmei QuantumLtd (SHSE:600167) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Luenmei Quantum Co.,Ltd (SHSE:600167) 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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Luenmei QuantumLtd

How Much Debt Does Luenmei QuantumLtd Carry?

The image below, which you can click on for greater detail, shows that Luenmei QuantumLtd had debt of CN¥1.63b at the end of September 2024, a reduction from CN¥2.09b over a year. But on the other hand it also has CN¥6.66b in cash, leading to a CN¥5.03b net cash position.

How Healthy Is Luenmei QuantumLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Luenmei QuantumLtd had liabilities of CN¥3.22b due within 12 months and liabilities of CN¥1.66b due beyond that. Offsetting these obligations, it had cash of CN¥6.66b as well as receivables valued at CN¥1.18b due within 12 months. So it actually has CN¥2.96b more liquid assets than total liabilities.

It's good to see that Luenmei QuantumLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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 Luenmei QuantumLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Luenmei QuantumLtd's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Luenmei QuantumLtd's ability to maintain a healthy balance sheet going forward. 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. While Luenmei QuantumLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Luenmei QuantumLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Luenmei QuantumLtd has net cash of CN¥5.03b, as well as more liquid assets than liabilities. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in CN¥1.2b. So is Luenmei QuantumLtd's debt a risk? It doesn't seem so to us. 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. Be aware that Luenmei QuantumLtd is showing 2 warning signs in our investment analysis , you should know about...

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.