Does Litu Holdings (HKG:1008) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Litu Holdings Limited (HKG:1008) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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How Much Debt Does Litu Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Litu Holdings had HK$396.0m of debt, an increase on HK$294.7m, over one year. But on the other hand it also has HK$406.9m in cash, leading to a HK$10.9m net cash position.

A Look At Litu Holdings' Liabilities

The latest balance sheet data shows that Litu Holdings had liabilities of HK$834.4m due within a year, and liabilities of HK$73.5m falling due after that. Offsetting this, it had HK$406.9m in cash and HK$490.0m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Since publicly traded Litu Holdings shares are worth a total of HK$291.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Litu Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Litu Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Litu Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to HK$1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Litu Holdings?

While Litu Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$9.2m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 3 warning signs for Litu Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.