We Think Lisi Group (Holdings) (HKG:526) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Lisi Group (Holdings) Limited (HKG:526) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lisi Group (Holdings)

How Much Debt Does Lisi Group (Holdings) Carry?

The image below, which you can click on for greater detail, shows that Lisi Group (Holdings) had debt of CN¥752.9m at the end of September 2022, a reduction from CN¥2.84b over a year. But on the other hand it also has CN¥1.15b in cash, leading to a CN¥396.9m net cash position.

A Look At Lisi Group (Holdings)'s Liabilities

The latest balance sheet data shows that Lisi Group (Holdings) had liabilities of CN¥1.53b due within a year, and liabilities of CN¥210.3m falling due after that. On the other hand, it had cash of CN¥1.15b and CN¥953.3m worth of receivables due within a year. So it actually has CN¥365.0m more liquid assets than total liabilities.

This luscious liquidity implies that Lisi Group (Holdings)'s balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Lisi Group (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Lisi Group (Holdings) improved its EBIT from a last year's loss to a positive CN¥127m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lisi Group (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Lisi Group (Holdings) 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. In the last year, Lisi Group (Holdings)'s free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Lisi Group (Holdings) has net cash of CN¥396.9m and plenty of liquid assets. So we are not troubled with Lisi Group (Holdings)'s debt use. 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. To that end, you should learn about the 3 warning signs we've spotted with Lisi Group (Holdings) (including 2 which are a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.