Leader Environmental Technologies (SGX:LS9) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Leader Environmental Technologies Limited (SGX:LS9) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Leader Environmental Technologies

What Is Leader Environmental Technologies's Net Debt?

As you can see below, at the end of December 2021, Leader Environmental Technologies had CN¥26.1m of debt, up from CN¥24.0m a year ago. Click the image for more detail. However, it does have CN¥95.1m in cash offsetting this, leading to net cash of CN¥69.0m.

How Healthy Is Leader Environmental Technologies' Balance Sheet?

We can see from the most recent balance sheet that Leader Environmental Technologies had liabilities of CN¥35.4m falling due within a year, and liabilities of CN¥24.9m due beyond that. Offsetting these obligations, it had cash of CN¥95.1m as well as receivables valued at CN¥43.0m due within 12 months. So it can boast CN¥77.8m more liquid assets than total liabilities.

It's good to see that Leader Environmental Technologies has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Leader Environmental Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Leader Environmental Technologies will need earnings to service that debt. 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 reported revenue of CN¥50m, which is a gain of 263%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Leader Environmental Technologies?

While Leader Environmental Technologies lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥5.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 263% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Leader Environmental Technologies (of which 1 shouldn't be ignored!) you should know about.

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.