Here's Why Logory Logistics Technology (HKG:2482) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Logory Logistics Technology Co., Ltd. (HKG:2482) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Logory Logistics Technology

What Is Logory Logistics Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Logory Logistics Technology had CN¥265.4m of debt, an increase on CN¥40.1m, over one year. However, its balance sheet shows it holds CN¥599.5m in cash, so it actually has CN¥334.2m net cash.

How Healthy Is Logory Logistics Technology's Balance Sheet?

The latest balance sheet data shows that Logory Logistics Technology had liabilities of CN¥1.96b due within a year, and liabilities of CN¥18.2m falling due after that. Offsetting this, it had CN¥599.5m in cash and CN¥1.84b in receivables that were due within 12 months. So it actually has CN¥462.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Logory Logistics Technology's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Logory Logistics Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Logory Logistics Technology turned things around in the last 12 months, delivering and EBIT of CN¥19m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Logory Logistics Technology 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Logory Logistics Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Logory Logistics Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Logory Logistics Technology has net cash of CN¥334.2m, as well as more liquid assets than liabilities. So we don't have any problem with Logory Logistics Technology's use of debt. 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. Case in point: We've spotted 2 warning signs for Logory Logistics Technology you should be aware of, and 1 of them is a bit unpleasant.

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.