Is Lee & Man Paper Manufacturing (HKG:2314) 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.' 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. We note that Lee & Man Paper Manufacturing Limited (HKG:2314) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. 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.

What Is Lee & Man Paper Manufacturing's Debt?

As you can see below, Lee & Man Paper Manufacturing had HK$21.9b of debt, at June 2025, 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 HK$1.66b, its net debt is less, at about HK$20.3b.

How Healthy Is Lee & Man Paper Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lee & Man Paper Manufacturing had liabilities of HK$12.3b due within 12 months and liabilities of HK$14.6b due beyond that. Offsetting these obligations, it had cash of HK$1.66b as well as receivables valued at HK$4.78b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$20.5b.

This deficit casts a shadow over the HK$12.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Lee & Man Paper Manufacturing would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Lee & Man Paper Manufacturing

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Lee & Man Paper Manufacturing has a rather high debt to EBITDA ratio of 13.3 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 5.1 times, suggesting it can responsibly service its obligations. Unfortunately, Lee & Man Paper Manufacturing saw its EBIT slide 5.2% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lee & Man Paper Manufacturing 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Lee & Man Paper Manufacturing saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Lee & Man Paper Manufacturing's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its interest cover is not so bad. Taking into account all the aforementioned factors, it looks like Lee & Man Paper Manufacturing has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Be aware that Lee & Man Paper Manufacturing is showing 2 warning signs in our investment analysis , and 1 of those is 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.