We Think Li Peng Enterprise (TPE:1447) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Li Peng Enterprise Co., Ltd. (TPE:1447) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 Li Peng Enterprise

How Much Debt Does Li Peng Enterprise Carry?

The image below, which you can click on for greater detail, shows that Li Peng Enterprise had debt of NT$6.02b at the end of September 2020, a reduction from NT$6.43b over a year. On the flip side, it has NT$2.70b in cash leading to net debt of about NT$3.31b.

How Strong Is Li Peng Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Li Peng Enterprise had liabilities of NT$6.92b due within 12 months and liabilities of NT$1.42b due beyond that. On the other hand, it had cash of NT$2.70b and NT$2.51b worth of receivables due within a year. So it has liabilities totalling NT$3.13b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Li Peng Enterprise is worth NT$7.65b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Li Peng Enterprise 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.

Over 12 months, Li Peng Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$12b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

While Li Peng Enterprise's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$631m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of NT$843m into a profit. In the meantime, we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Li Peng Enterprise (including 2 which are potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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