Does Leader Environmental Technologies (SGX:LS9) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Leader Environmental Technologies Limited (SGX:LS9) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Leader Environmental Technologies

What Is Leader Environmental Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Leader Environmental Technologies had CN¥28.7m of debt, an increase on CN¥26.1m, over one year. However, it does have CN¥48.9m in cash offsetting this, leading to net cash of CN¥20.2m.

How Strong Is Leader Environmental Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Leader Environmental Technologies had liabilities of CN¥81.2m due within 12 months and liabilities of CN¥26.0m due beyond that. Offsetting this, it had CN¥48.9m in cash and CN¥52.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥6.36m more than its cash and near-term receivables, combined.

This state of affairs indicates that Leader Environmental Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥821.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Leader Environmental Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Leader Environmental Technologies'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.

In the last year Leader Environmental Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to CN¥90m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Leader Environmental Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Leader Environmental Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥41m of cash and made a loss of CN¥16m. However, it has net cash of CN¥20.2m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Leader Environmental Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 3 warning signs for Leader Environmental Technologies you should be aware of, and 2 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.