Is Luo Lih-Fen Holding (TWSE:6666) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Luo Lih-Fen Holding Co., Ltd. (TWSE:6666) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Luo Lih-Fen Holding

How Much Debt Does Luo Lih-Fen Holding Carry?

The image below, which you can click on for greater detail, shows that Luo Lih-Fen Holding had debt of NT$84.2m at the end of June 2024, a reduction from NT$148.8m over a year. However, its balance sheet shows it holds NT$945.9m in cash, so it actually has NT$861.7m net cash.

How Healthy Is Luo Lih-Fen Holding's Balance Sheet?

According to the last reported balance sheet, Luo Lih-Fen Holding had liabilities of NT$547.6m due within 12 months, and liabilities of NT$78.4m due beyond 12 months. On the other hand, it had cash of NT$945.9m and NT$21.8m worth of receivables due within a year. So it actually has NT$341.8m more liquid assets than total liabilities.

This surplus suggests that Luo Lih-Fen Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Luo Lih-Fen Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Luo Lih-Fen Holding grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Luo Lih-Fen Holding 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Luo Lih-Fen Holding 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, Luo Lih-Fen Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Luo Lih-Fen Holding has NT$861.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$328m, being 206% of its EBIT. So we don't think Luo Lih-Fen Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Luo Lih-Fen Holding (1 is significant) you should be aware of.

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.