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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Li Peng Enterprise Co., Ltd. (TPE:1447) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Li Peng Enterprise

What Is Li Peng Enterprise's Debt?

You can click the graphic below for the historical numbers, but it shows that Li Peng Enterprise had NT$5.28b of debt in December 2020, down from NT$6.24b, one year before. However, it also had NT$2.02b in cash, and so its net debt is NT$3.25b.

A Look At Li Peng Enterprise's Liabilities

The latest balance sheet data shows that Li Peng Enterprise had liabilities of NT$5.16b due within a year, and liabilities of NT$2.26b falling due after that. On the other hand, it had cash of NT$2.02b and NT$2.58b worth of receivables due within a year. So it has liabilities totalling NT$2.81b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Li Peng Enterprise is worth NT$8.28b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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$14b, which is a fall of 6.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Li Peng Enterprise had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$357m. 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. 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$412m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Li Peng Enterprise 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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