Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Lecron Industrial Development Group Co., Ltd. (SZSE:300343) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Lecron Industrial Development Group's Debt?

As you can see below, Lecron Industrial Development Group had CN¥108.5m of debt at September 2024, down from CN¥172.4m a year prior. However, its balance sheet shows it holds CN¥643.7m in cash, so it actually has CN¥535.2m net cash.

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¥448.6m falling due within a year, and liabilities of CN¥69.1m due beyond that. Offsetting this, it had CN¥643.7m in cash and CN¥433.9m in receivables that were due within 12 months. So it actually has CN¥559.9m 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. Simply put, the fact that Lecron Industrial Development Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lecron Industrial Development Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Lecron Industrial Development Group had a loss before interest and tax, and actually shrunk its revenue by 4.4%, to CN¥972m. That's not what we would hope to see.

So How Risky Is Lecron Industrial Development Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Lecron Industrial Development Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥116m and booked a CN¥34m accounting loss. But the saving grace is the CN¥535.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Lecron Industrial Development Group has 1 warning sign we think you should be aware of.

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.