We Think LARGAN PrecisionLtd (TWSE:3008) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 LARGAN Precision Co.,Ltd (TWSE:3008) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LARGAN PrecisionLtd

What Is LARGAN PrecisionLtd's Debt?

As you can see below, at the end of September 2024, LARGAN PrecisionLtd had NT$145.3m of debt, up from NT$968.0k a year ago. Click the image for more detail. But on the other hand it also has NT$109.2b in cash, leading to a NT$109.1b net cash position.

How Healthy Is LARGAN PrecisionLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LARGAN PrecisionLtd had liabilities of NT$27.2b due within 12 months and liabilities of NT$303.7m due beyond that. On the other hand, it had cash of NT$109.2b and NT$14.9b worth of receivables due within a year. So it can boast NT$96.6b more liquid assets than total liabilities.

This excess liquidity suggests that LARGAN PrecisionLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, LARGAN PrecisionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that LARGAN PrecisionLtd has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LARGAN PrecisionLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, LARGAN PrecisionLtd generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LARGAN PrecisionLtd has net cash of NT$109.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in NT$10b. When it comes to LARGAN PrecisionLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For instance, we've identified 2 warning signs for LARGAN PrecisionLtd (1 is a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.