Is LARGAN PrecisionLtd (TWSE:3008) Using Too Much 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 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 LARGAN Precision Co.,Ltd (TWSE:3008) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

What Is LARGAN PrecisionLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 LARGAN PrecisionLtd had NT$203.4m of debt, an increase on none, over one year. But on the other hand it also has NT$128.0b in cash, leading to a NT$127.8b net cash position.

How Healthy Is LARGAN PrecisionLtd's Balance Sheet?

The latest balance sheet data shows that LARGAN PrecisionLtd had liabilities of NT$30.6b due within a year, and liabilities of NT$561.1m falling due after that. Offsetting this, it had NT$128.0b in cash and NT$11.3b in receivables that were due within 12 months. So it actually has NT$108.2b more liquid assets than total liabilities.

This luscious liquidity implies that LARGAN PrecisionLtd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that LARGAN PrecisionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for LARGAN PrecisionLtd

On top of that, LARGAN PrecisionLtd grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LARGAN PrecisionLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. LARGAN PrecisionLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, LARGAN PrecisionLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LARGAN PrecisionLtd has net cash of NT$127.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$20b, being 106% of its EBIT. The bottom line is that we do not find LARGAN PrecisionLtd's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that LARGAN PrecisionLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.