Logah Technology (TWSE:3593) Is Making Moderate Use Of 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 can see that Logah Technology Corp. (TWSE:3593) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Logah Technology

What Is Logah Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Logah Technology had NT$646.6m of debt, an increase on NT$582.5m, over one year. However, it also had NT$92.8m in cash, and so its net debt is NT$553.8m.

How Strong Is Logah Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Logah Technology had liabilities of NT$876.5m due within 12 months and liabilities of NT$155.0m due beyond that. On the other hand, it had cash of NT$92.8m and NT$342.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$595.9m.

While this might seem like a lot, it is not so bad since Logah Technology has a market capitalization of NT$1.22b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Logah Technology 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 Logah Technology had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to NT$882m. That's not what we would hope to see.

Caveat Emptor

Importantly, Logah Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$73m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$60m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. For instance, we've identified 2 warning signs for Logah Technology that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.