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.' 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. Importantly, Lecron Industrial Development Group Co., Ltd. (SZSE:300343) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Lecron Industrial Development Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Lecron Industrial Development Group had CN¥191.2m of debt in March 2024, down from CN¥369.7m, one year before. However, it does have CN¥910.6m in cash offsetting this, leading to net cash of CN¥719.3m.

How Strong Is Lecron Industrial Development Group's Balance Sheet?

We can see from the most recent balance sheet that Lecron Industrial Development Group had liabilities of CN¥772.4m falling due within a year, and liabilities of CN¥45.1m due beyond that. On the other hand, it had cash of CN¥910.6m and CN¥518.8m worth of receivables due within a year. So it can boast CN¥611.8m more liquid assets than total liabilities.

This surplus suggests that Lecron Industrial Development Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lecron Industrial Development Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Lecron Industrial Development Group 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.

Over 12 months, Lecron Industrial Development Group made a loss at the EBIT level, and saw its revenue drop to CN¥947m, which is a fall of 44%. That makes us nervous, to say the least.

So How Risky Is Lecron Industrial Development Group?

While Lecron Industrial Development Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥36m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Lecron Industrial Development Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.

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