Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Lisi Group (Holdings) Limited (HKG:526) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Lisi Group (Holdings)
What Is Lisi Group (Holdings)'s Net Debt?
The image below, which you can click on for greater detail, shows that Lisi Group (Holdings) had debt of CN¥665.0m at the end of March 2024, a reduction from CN¥848.1m over a year. However, it does have CN¥1.35b in cash offsetting this, leading to net cash of CN¥684.9m.
How Strong Is Lisi Group (Holdings)'s Balance Sheet?
The latest balance sheet data shows that Lisi Group (Holdings) had liabilities of CN¥1.43b due within a year, and liabilities of CN¥245.4m falling due after that. Offsetting this, it had CN¥1.35b in cash and CN¥1.09b in receivables that were due within 12 months. So it actually has CN¥763.0m more liquid assets than total liabilities.
This surplus liquidity suggests that Lisi Group (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Lisi Group (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Lisi Group (Holdings) grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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 Lisi Group (Holdings) 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lisi Group (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Lisi Group (Holdings) reported free cash flow worth 6.4% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Lisi Group (Holdings) has CN¥684.9m in net cash and a strong balance sheet. And we liked the look of last year's 21% year-on-year EBIT growth. So is Lisi Group (Holdings)'s debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lisi Group (Holdings) you should know about.
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.