Leader Environmental Technologies (SGX:LS9) Is Carrying A Fair Bit Of Debt

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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Leader Environmental Technologies

What Is Leader Environmental Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Leader Environmental Technologies had CN¥117.3m of debt, an increase on CN¥28.7m, over one year. On the flip side, it has CN¥98.5m in cash leading to net debt of about CN¥18.8m.

A Look At Leader Environmental Technologies' Liabilities

According to the last reported balance sheet, Leader Environmental Technologies had liabilities of CN¥49.9m due within 12 months, and liabilities of CN¥111.9m due beyond 12 months. On the other hand, it had cash of CN¥98.5m and CN¥68.8m worth of receivables due within a year. So it can boast CN¥5.60m more liquid assets than total liabilities.

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¥426.9m company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Leader Environmental Technologies made a loss at the EBIT level, and saw its revenue drop to CN¥33m, which is a fall of 41%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Leader Environmental Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥61m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. For instance, we've identified 3 warning signs for Leader Environmental Technologies (1 doesn't sit too well with us) you should be aware of.

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.