Health Check: How Prudently Does Lead Data (TPE:2443) Use Debt?

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 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 Lead Data Inc. (TPE:2443) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lead Data

What Is Lead Data's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lead Data had NT$67.9m of debt in September 2020, down from NT$225.6m, one year before. But on the other hand it also has NT$236.7m in cash, leading to a NT$168.8m net cash position.

A Look At Lead Data's Liabilities

The latest balance sheet data shows that Lead Data had liabilities of NT$349.7m due within a year, and liabilities of NT$73.6m falling due after that. On the other hand, it had cash of NT$236.7m and NT$75.0m worth of receivables due within a year. So its liabilities total NT$111.6m more than the combination of its cash and short-term receivables.

Lead Data has a market capitalization of NT$450.2m, so it could very likely raise cash to ameliorate 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. Despite its noteworthy liabilities, Lead Data boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lead Data 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, Lead Data made a loss at the EBIT level, and saw its revenue drop to NT$570m, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is Lead Data?

Although Lead Data had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$5.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Lead Data (of which 1 is significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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