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 Leyou Technologies Holdings Limited (HKG:1089) does use debt in its business. But is this debt a concern to shareholders?
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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Leyou Technologies Holdings
What Is Leyou Technologies Holdings's Debt?
As you can see below, at the end of June 2019, Leyou Technologies Holdings had US$38.5m of debt, up from US$25.4m a year ago. Click the image for more detail. However, it also had US$32.9m in cash, and so its net debt is US$5.62m.
How Strong Is Leyou Technologies Holdings's Balance Sheet?
According to the last reported balance sheet, Leyou Technologies Holdings had liabilities of US$66.1m due within 12 months, and liabilities of US$22.8m due beyond 12 months. On the other hand, it had cash of US$32.9m and US$50.4m worth of receivables due within a year. So its liabilities total US$5.64m more than the combination of its cash and short-term receivables.
Having regard to Leyou Technologies Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Leyou Technologies Holdings has a very light debt load indeed.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.