The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Ban Leong Technologies Limited (SGX:B26) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ban Leong Technologies

What Is Ban Leong Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Ban Leong Technologies had debt of S$3.94m at the end of September 2019, a reduction from S$5.93m over a year. But it also has S$10.3m in cash to offset that, meaning it has S$6.32m net cash.

How Healthy Is Ban Leong Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ban Leong Technologies had liabilities of S$27.3m due within 12 months and liabilities of S$2.65m due beyond that. Offsetting this, it had S$10.3m in cash and S$21.8m in receivables that were due within 12 months. So it actually has S$2.13m more liquid assets than total liabilities.

This surplus suggests that Ban Leong Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ban Leong Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Ban Leong Technologies's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Ban Leong Technologies'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.