Does Li Peng Enterprise (TWSE:1447) Have A Healthy Balance Sheet?

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 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. We note that Li Peng Enterprise Co., Ltd. (TWSE:1447) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Li Peng Enterprise

What Is Li Peng Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that Li Peng Enterprise had debt of NT$4.86b at the end of June 2024, a reduction from NT$6.16b over a year. However, it also had NT$4.08b in cash, and so its net debt is NT$774.7m.

How Strong Is Li Peng Enterprise's Balance Sheet?

According to the last reported balance sheet, Li Peng Enterprise had liabilities of NT$9.73b due within 12 months, and liabilities of NT$2.15b due beyond 12 months. Offsetting these obligations, it had cash of NT$4.08b as well as receivables valued at NT$4.71b due within 12 months. So its liabilities total NT$3.08b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Li Peng Enterprise is worth NT$7.55b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Li Peng Enterprise's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Li Peng Enterprise wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to NT$32b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Li Peng Enterprise had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$338m 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$26m into a profit. In the meantime, we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Li Peng Enterprise's profit, revenue, and operating cashflow have changed over the last few years.

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.