Does L&K Engineering (TWSE:6139) Have A Healthy Balance Sheet?

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.' 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, L&K Engineering Co., Ltd. (TWSE:6139) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for L&K Engineering

How Much Debt Does L&K Engineering Carry?

The image below, which you can click on for greater detail, shows that L&K Engineering had debt of NT$2.56b at the end of March 2024, a reduction from NT$5.02b over a year. However, it does have NT$19.3b in cash offsetting this, leading to net cash of NT$16.8b.

How Strong Is L&K Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that L&K Engineering had liabilities of NT$35.3b due within 12 months and liabilities of NT$1.54b due beyond that. Offsetting this, it had NT$19.3b in cash and NT$21.4b in receivables that were due within 12 months. So it can boast NT$3.88b more liquid assets than total liabilities.

This short term liquidity is a sign that L&K Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that L&K Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that L&K Engineering grew its EBIT by 218% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since L&K Engineering 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While L&K Engineering 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. Happily for any shareholders, L&K Engineering actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that L&K Engineering has net cash of NT$16.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$8.4b, being 268% of its EBIT. So is L&K Engineering's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for L&K Engineering (1 is a bit unpleasant) 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.