Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Head of Environmental Technologies Limited (SGX:LS9) is in debt. But does this debt worry shareholders?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Leader Environmental Technologies
What is Leader Environmental Technologies’ net debt?
As you can see below, at the end of December 2021, Leader Environmental Technologies had a debt of 26.1 million Canadian yen, compared to 24.0 million Canadian yen a year ago. Click on the image for more details. However, he has 95.1 million Canadian yen in cash to offset this, resulting in net cash of 69.0 million Canadian yen.
How healthy is Leader Environmental Technologies’ balance sheet?
We can see from the most recent balance sheet that Leader Environmental Technologies had liabilities of 35.4 million yen due within one year, and liabilities of 24.9 million yen due beyond. As compensation for these obligations, it had cash of 95.1 million yen as well as receivables valued at 43.0 million yen due within 12 months. He can therefore boast of having 77.8 million yen more in liquid assets than total Passives.
It’s good to see that Leader Environmental Technologies has plenty of cash on its balance sheet, suggesting conservative liability management. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. In short, Leader Environmental Technologies has a net cash position, so it’s fair to say that they don’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Leader Environmental Technologies will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Year-over-year, Leader Environmental Technologies reported revenue of C$50 million, a gain of 263%, although it reported no earnings before interest and taxes. That’s practically the hole-in-one of revenue growth!
So how risky is the environmental tech leader?
While Leader Environmental Technologies lost money in earnings before interest and taxes (EBIT), it actually recorded a paper profit of 5.8 million yen. So taking that at face value, and considering the money, we don’t think it’s very risky in the short term. Bearing in mind its 263% revenue growth over the past year, we think there’s a good chance the company is on the right track. We would see strong new growth as an optimistic indication. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Leader Environmental Technologies (1 of which should not be ignored!) that you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.