Is Li Cheng Enterprise (TWSE:4426) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Li Cheng Enterprise Co., Ltd. (TWSE:4426) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Li Cheng Enterprise

How Much Debt Does Li Cheng Enterprise Carry?

As you can see below, Li Cheng Enterprise had NT$2.07b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of NT$644.2m, its net debt is less, at about NT$1.42b.

A Look At Li Cheng Enterprise's Liabilities

According to the last reported balance sheet, Li Cheng Enterprise had liabilities of NT$715.6m due within 12 months, and liabilities of NT$1.50b due beyond 12 months. Offsetting these obligations, it had cash of NT$644.2m as well as receivables valued at NT$153.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.41b.

This deficit is considerable relative to its market capitalization of NT$2.04b, so it does suggest shareholders should keep an eye on Li Cheng Enterprise's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Li Cheng Enterprise will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Li Cheng Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$1.0b, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While Li Cheng 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. Its EBIT loss was a whopping NT$205m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$224m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Li Cheng Enterprise (2 make us uncomfortable) you should be aware of.

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. 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.