Is Leadtek Research (TWSE:2465) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Leadtek Research Inc. (TWSE:2465) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Leadtek Research

How Much Debt Does Leadtek Research Carry?

As you can see below, Leadtek Research had NT$633.4m of debt at March 2024, down from NT$964.3m a year prior. However, because it has a cash reserve of NT$356.1m, its net debt is less, at about NT$277.3m.

A Look At Leadtek Research's Liabilities

We can see from the most recent balance sheet that Leadtek Research had liabilities of NT$2.27b falling due within a year, and liabilities of NT$118.8m due beyond that. Offsetting this, it had NT$356.1m in cash and NT$324.1m in receivables that were due within 12 months. So it has liabilities totalling NT$1.71b more than its cash and near-term receivables, combined.

Given Leadtek Research has a market capitalization of NT$9.49b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Leadtek Research'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.

In the last year Leadtek Research had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to NT$4.4b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Leadtek Research produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$115m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$261m of cash over the last year. So to be blunt we think it is risky. 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. For instance, we've identified 4 warning signs for Leadtek Research (3 can't be ignored) 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.

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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.

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