Is Laekna (HKG:2105) A Risky Investment?

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.' 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. Importantly, Laekna, Inc. (HKG:2105) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Laekna's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Laekna had CN¥99.0m of debt, an increase on CN¥49.4m, over one year. But on the other hand it also has CN¥800.0m in cash, leading to a CN¥701.0m net cash position.

How Healthy Is Laekna's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Laekna had liabilities of CN¥148.5m due within 12 months and liabilities of CN¥6.77m due beyond that. Offsetting this, it had CN¥800.0m in cash and CN¥1.09m in receivables that were due within 12 months. So it can boast CN¥645.9m more liquid assets than total liabilities.

This surplus suggests that Laekna has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Laekna boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Laekna will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Laekna

Given its lack of meaningful operating revenue, Laekna shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Laekna?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Laekna had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥280m of cash and made a loss of CN¥254m. But the saving grace is the CN¥701.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Laekna (including 1 which is potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.