Here's Why Lai Yih Footwear (TWSE:6890) Can Manage Its Debt Responsibly

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 can see that Lai Yih Footwear Co., Ltd. (TWSE:6890) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lai Yih Footwear

How Much Debt Does Lai Yih Footwear Carry?

As you can see below, Lai Yih Footwear had NT$2.28b of debt at September 2024, down from NT$2.94b a year prior. However, its balance sheet shows it holds NT$3.50b in cash, so it actually has NT$1.22b net cash.

How Healthy Is Lai Yih Footwear's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lai Yih Footwear had liabilities of NT$6.36b due within 12 months and liabilities of NT$594.8m due beyond that. On the other hand, it had cash of NT$3.50b and NT$7.56b worth of receivables due within a year. So it actually has NT$4.11b more liquid assets than total liabilities.

This short term liquidity is a sign that Lai Yih Footwear could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lai Yih Footwear boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Lai Yih Footwear grew its EBIT by 191% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lai Yih Footwear's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Lai Yih Footwear has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Lai Yih Footwear recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lai Yih Footwear has NT$1.22b in net cash and a decent-looking balance sheet. And we liked the look of last year's 191% year-on-year EBIT growth. So we don't have any problem with Lai Yih Footwear's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Lai Yih Footwear .

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. 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.