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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 Luminex Corporation (NASDAQ:LMNX) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, 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.
How Much Debt Does Luminex Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Luminex had US$200.5m of debt, an increase on none, over one year. But on the other hand it also has US$308.5m in cash, leading to a US$107.9m net cash position.
How Strong Is Luminex's Balance Sheet?
The latest balance sheet data shows that Luminex had liabilities of US$76.2m due within a year, and liabilities of US$218.6m falling due after that. Offsetting these obligations, it had cash of US$308.5m as well as receivables valued at US$60.5m due within 12 months. So it actually has US$74.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Luminex could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Luminex boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Luminex made a loss at the EBIT level, last year, but improved that to positive EBIT of US$36m in the last twelve months. 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 Luminex 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Luminex 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. Over the last year, Luminex recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case Luminex has US$107.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$30m. So we don't think Luminex's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Luminex .
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.
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. 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.
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