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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Linklogis Inc. (HKG:9959) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Linklogis
What Is Linklogis's Debt?
You can click the graphic below for the historical numbers, but it shows that Linklogis had CN¥270.5m of debt in June 2024, down from CN¥581.8m, one year before. However, its balance sheet shows it holds CN¥5.52b in cash, so it actually has CN¥5.25b net cash.
A Look At Linklogis' Liabilities
The latest balance sheet data shows that Linklogis had liabilities of CN¥959.6m due within a year, and liabilities of CN¥75.5m falling due after that. On the other hand, it had cash of CN¥5.52b and CN¥2.46b worth of receivables due within a year. So it can boast CN¥6.94b more liquid assets than total liabilities.
This surplus strongly suggests that Linklogis has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Linklogis has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Linklogis'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.
In the last year Linklogis wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥890m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Linklogis?
While Linklogis lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥132m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Linklogis you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.