Leadtek Research (TWSE:2465) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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. As with many other companies Leadtek Research Inc. (TWSE:2465) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Leadtek Research

What Is Leadtek Research's Debt?

You can click the graphic below for the historical numbers, but it shows that Leadtek Research had NT$630.4m of debt in September 2024, down from NT$901.2m, one year before. On the flip side, it has NT$425.5m in cash leading to net debt of about NT$204.9m.

How Strong Is Leadtek Research's Balance Sheet?

According to the last reported balance sheet, Leadtek Research had liabilities of NT$2.68b due within 12 months, and liabilities of NT$185.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$425.5m as well as receivables valued at NT$243.1m due within 12 months. So its liabilities total NT$2.19b more than the combination of its cash and short-term receivables.

Leadtek Research has a market capitalization of NT$6.67b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Leadtek Research 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.

In the last year Leadtek Research wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to NT$4.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Leadtek Research managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at NT$256m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$499m of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should learn about the 3 warning signs we've spotted with Leadtek Research (including 2 which are a bit unpleasant) .

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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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.