LB Semicon (KOSDAQ:061970) Is Carrying A Fair Bit Of Debt

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. As with many other companies LB Semicon Inc. (KOSDAQ:061970) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for LB Semicon

How Much Debt Does LB Semicon Carry?

As you can see below, at the end of September 2023, LB Semicon had ₩316.3b of debt, up from ₩296.3b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩83.0b, its net debt is less, at about ₩233.4b.

A Look At LB Semicon's Liabilities

The latest balance sheet data shows that LB Semicon had liabilities of ₩251.2b due within a year, and liabilities of ₩171.0b falling due after that. On the other hand, it had cash of ₩83.0b and ₩88.7b worth of receivables due within a year. So it has liabilities totalling ₩250.5b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩310.9b, so it does suggest shareholders should keep an eye on LB Semicon's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LB Semicon's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, LB Semicon made a loss at the EBIT level, and saw its revenue drop to ₩418b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

Not only did LB Semicon's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩5.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩50b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that LB Semicon is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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