Luenmei QuantumLtd (SHSE:600167) Could Easily Take On More Debt

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.' 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 Luenmei Quantum Co.,Ltd (SHSE:600167) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Luenmei QuantumLtd

What Is Luenmei QuantumLtd's Debt?

The chart below, which you can click on for greater detail, shows that Luenmei QuantumLtd had CN¥2.05b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥8.05b in cash, so it actually has CN¥5.99b net cash.

How Strong Is Luenmei QuantumLtd's Balance Sheet?

We can see from the most recent balance sheet that Luenmei QuantumLtd had liabilities of CN¥3.54b falling due within a year, and liabilities of CN¥1.78b due beyond that. Offsetting these obligations, it had cash of CN¥8.05b as well as receivables valued at CN¥1.11b due within 12 months. So it can boast CN¥3.84b 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. Because it has plenty of assets, it is unlikely to have trouble 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 26% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Luenmei QuantumLtd 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. Over the last three years, Luenmei QuantumLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Luenmei QuantumLtd has CN¥5.99b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.3b, being 139% of its EBIT. 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. 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 Luenmei QuantumLtd .

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.