Leader Environmental Technologies (SGX:LS9) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Leader Environmental Technologies Limited (SGX:LS9) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Leader Environmental Technologies

How Much Debt Does Leader Environmental Technologies Carry?

As you can see below, Leader Environmental Technologies had CN¥24.0m of debt at December 2020, down from CN¥50.0m a year prior. However, its balance sheet shows it holds CN¥47.6m in cash, so it actually has CN¥23.6m net cash.

A Look At Leader Environmental Technologies' Liabilities

The latest balance sheet data shows that Leader Environmental Technologies had liabilities of CN¥73.6m due within a year, and liabilities of CN¥446.0k falling due after that. On the other hand, it had cash of CN¥47.6m and CN¥24.4m worth of receivables due within a year. So its liabilities total CN¥1.98m more than the combination of its cash and short-term receivables.

Having regard to Leader Environmental Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥899.4m company is struggling for cash, we still think it's worth monitoring its 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Leader Environmental Technologies had a loss before interest and tax, and actually shrunk its revenue by 63%, to CN¥14m. That makes us nervous, to say the least.

So How Risky Is Leader Environmental Technologies?

Although Leader Environmental Technologies had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥17m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 Leader Environmental Technologies is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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