Li Cheng Enterprise (TPE:4426) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Cheng Enterprise Co., Ltd. (TPE:4426) does have debt on its balance sheet. But is this debt a concern to shareholders?

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

See our latest analysis for Li Cheng Enterprise

What Is Li Cheng Enterprise's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Li Cheng Enterprise had NT$1.58b of debt, an increase on NT$1.50b, over one year. On the flip side, it has NT$995.7m in cash leading to net debt of about NT$588.4m.

A Look At Li Cheng Enterprise's Liabilities

According to the last reported balance sheet, Li Cheng Enterprise had liabilities of NT$572.1m due within 12 months, and liabilities of NT$1.23b due beyond 12 months. Offsetting this, it had NT$995.7m in cash and NT$246.0m in receivables that were due within 12 months. So its liabilities total NT$556.2m more than the combination of its cash and short-term receivables.

Of course, Li Cheng Enterprise has a market capitalization of NT$4.33b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Li Cheng 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.

In the last year Li Cheng Enterprise had a loss before interest and tax, and actually shrunk its revenue by 40%, to NT$1.4b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Li Cheng Enterprise's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$44m. 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$53m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 2 warning signs for Li Cheng Enterprise you should be aware of, and 1 of them can't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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