Is Ledtech Electronics (TPE:6164) Using Debt In A Risky Way?

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 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. We note that Ledtech Electronics Corp. (TPE:6164) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Ledtech Electronics

What Is Ledtech Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that Ledtech Electronics had debt of NT$238.2m at the end of December 2020, a reduction from NT$372.0m over a year. However, it does have NT$487.1m in cash offsetting this, leading to net cash of NT$248.9m.

How Healthy Is Ledtech Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ledtech Electronics had liabilities of NT$477.1m due within 12 months and liabilities of NT$116.1m due beyond that. Offsetting these obligations, it had cash of NT$487.1m as well as receivables valued at NT$252.9m due within 12 months. So it can boast NT$146.8m more liquid assets than total liabilities.

This surplus suggests that Ledtech Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ledtech Electronics 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 it is Ledtech Electronics's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Ledtech Electronics had a loss before interest and tax, and actually shrunk its revenue by 16%, to NT$761m. That's not what we would hope to see.

So How Risky Is Ledtech Electronics?

Although Ledtech Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$129m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Ledtech Electronics (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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