Is LC Logistics (HKG:2490) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that LC Logistics, Inc. (HKG:2490) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LC Logistics

How Much Debt Does LC Logistics Carry?

You can click the graphic below for the historical numbers, but it shows that LC Logistics had CN¥51.3m of debt in December 2023, down from CN¥76.6m, one year before. However, it does have CN¥217.9m in cash offsetting this, leading to net cash of CN¥166.6m.

How Healthy Is LC Logistics' Balance Sheet?

We can see from the most recent balance sheet that LC Logistics had liabilities of CN¥278.7m falling due within a year, and liabilities of CN¥2.35m due beyond that. Offsetting these obligations, it had cash of CN¥217.9m as well as receivables valued at CN¥90.2m due within 12 months. So it actually has CN¥27.0m more liquid assets than total liabilities.

Having regard to LC Logistics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.99b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, LC Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that LC Logistics's load is not too heavy, because its EBIT was down 71% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LC Logistics'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. LC Logistics 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. Over the last three years, LC Logistics 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LC Logistics has net cash of CN¥166.6m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about LC Logistics's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for LC Logistics that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.