Lida Holdings (TPE:4552) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Lida Holdings Limited (TPE:4552) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Lida Holdings

What Is Lida Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Lida Holdings had NT$158.0m of debt, an increase on NT$91.4m, over one year. However, it does have NT$2.98b in cash offsetting this, leading to net cash of NT$2.82b.

A Look At Lida Holdings' Liabilities

We can see from the most recent balance sheet that Lida Holdings had liabilities of NT$1.43b falling due within a year, and liabilities of NT$485.6m due beyond that. Offsetting this, it had NT$2.98b in cash and NT$995.3m in receivables that were due within 12 months. So it can boast NT$2.06b more liquid assets than total liabilities.

This excess liquidity is a great indication that Lida Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Lida Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Lida Holdings's saving grace is its low debt levels, because its EBIT has tanked 37% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Lida Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lida Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Lida Holdings recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Lida Holdings has net cash of NT$2.82b, as well as more liquid assets than liabilities. So we don't have any problem with Lida Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Lida Holdings (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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