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. As with many other companies Lucky Harvest Co., Ltd. (SZSE:002965) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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 Lucky Harvest
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Lucky Harvest had CN¥128.4m of debt, an increase on CN¥103.5m, over one year. But it also has CN¥1.33b in cash to offset that, meaning it has CN¥1.20b net cash.
Zooming in on the latest balance sheet data, we can see that Lucky Harvest had liabilities of CN¥2.95b due within 12 months and liabilities of CN¥103.5m due beyond that. Offsetting this, it had CN¥1.33b in cash and CN¥2.12b in receivables that were due within 12 months. So it can boast CN¥390.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Lucky Harvest could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lucky Harvest boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Lucky Harvest has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lucky Harvest can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lucky Harvest 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. During the last three years, Lucky Harvest burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Lucky Harvest has CN¥1.20b in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't have any problem with Lucky Harvest's use of debt. 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. For example Lucky Harvest has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.