We Think Leader Environmental Technologies (SGX:LS9) Has A Fair Chunk 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. We can see that Leader Environmental Technologies Limited (SGX:LS9) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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 June 2023 Leader Environmental Technologies had CN¥77.2m of debt, an increase on CN¥25.8m, over one year. However, it also had CN¥72.0m in cash, and so its net debt is CN¥5.18m.

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¥87.5m falling due within a year, and liabilities of CN¥68.5m due beyond that. Offsetting this, it had CN¥72.0m in cash and CN¥49.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥35.0m more than its cash and near-term receivables, combined.

Of course, Leader Environmental Technologies has a market capitalization of CN¥414.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Leader Environmental Technologies has virtually no net debt, 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¥70m, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Leader Environmental Technologies still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥38m. 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. Another cause for caution is that is bled CN¥42m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 can't be ignored) you should be aware of.

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.