Opple LightingLTD (SHSE:603515) Could Easily Take On More Debt

Simply Wall St · 10/16 03:04

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Opple Lighting Co.,LTD (SHSE:603515) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Opple LightingLTD

What Is Opple LightingLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that Opple LightingLTD had CN¥167.4m of debt in June 2024, down from CN¥225.2m, one year before. But on the other hand it also has CN¥5.67b in cash, leading to a CN¥5.50b net cash position.

debt-equity-history-analysis
SHSE:603515 Debt to Equity History October 16th 2024

A Look At Opple LightingLTD's Liabilities

According to the last reported balance sheet, Opple LightingLTD had liabilities of CN¥3.39b due within 12 months, and liabilities of CN¥78.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.67b as well as receivables valued at CN¥710.3m due within 12 months. So it can boast CN¥2.91b more liquid assets than total liabilities.

This excess liquidity suggests that Opple LightingLTD is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Opple LightingLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

While Opple LightingLTD doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Opple LightingLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Opple LightingLTD 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. Happily for any shareholders, Opple LightingLTD actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Opple LightingLTD has CN¥5.50b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in CN¥823m. So is Opple LightingLTD's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Opple LightingLTD , and understanding them should be part of your investment process.

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.