Is Lingsen Precision Industries (TPE:2369) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Lingsen Precision Industries, Ltd. (TPE:2369) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Lingsen Precision Industries

How Much Debt Does Lingsen Precision Industries Carry?

The chart below, which you can click on for greater detail, shows that Lingsen Precision Industries had NT$1.50b in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds NT$1.76b in cash, so it actually has NT$265.0m net cash.

A Look At Lingsen Precision Industries' Liabilities

The latest balance sheet data shows that Lingsen Precision Industries had liabilities of NT$1.65b due within a year, and liabilities of NT$924.8m falling due after that. On the other hand, it had cash of NT$1.76b and NT$1.36b worth of receivables due within a year. So it can boast NT$549.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Lingsen Precision Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lingsen Precision Industries boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Lingsen Precision Industries'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.

Over 12 months, Lingsen Precision Industries reported revenue of NT$5.2b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lingsen Precision Industries?

Although Lingsen Precision Industries had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$114m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Lingsen Precision Industries that you should be aware of.

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.

If you decide to trade Lingsen Precision Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.