David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Lai Si Enterprise Holding Limited (HKG:2266) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Lai Si Enterprise Holding

How Much Debt Does Lai Si Enterprise Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Lai Si Enterprise Holding had MO$54.8m of debt in December 2019, down from MO$61.7m, one year before. However, its balance sheet shows it holds MO$57.9m in cash, so it actually has MO$3.13m net cash.

How Strong Is Lai Si Enterprise Holding's Balance Sheet?

The latest balance sheet data shows that Lai Si Enterprise Holding had liabilities of MO$103.5m due within a year, and liabilities of MO$14.9m falling due after that. On the other hand, it had cash of MO$57.9m and MO$144.7m worth of receivables due within a year. So it can boast MO$84.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Lai Si Enterprise Holding's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Lai Si Enterprise Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

It is well worth noting that Lai Si Enterprise Holding's EBIT shot up like bamboo after rain, gaining 66% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lai Si Enterprise Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lai Si Enterprise Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lai Si Enterprise Holding burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Lai Si Enterprise Holding has MO$3.13m in net cash and a decent-looking balance sheet. And we liked the look of last year's 66% year-on-year EBIT growth. So we don't have any problem with Lai Si Enterprise Holding's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Lai Si Enterprise Holding you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.