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 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. Importantly, LPKF Laser & Electronics AG (ETR:LPK) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does LPKF Laser & Electronics Carry?
As you can see below, LPKF Laser & Electronics had €8.74m of debt at June 2019, down from €46.1m a year prior. But on the other hand it also has €9.82m in cash, leading to a €1.08m net cash position.
A Look At LPKF Laser & Electronics's Liabilities
According to the last reported balance sheet, LPKF Laser & Electronics had liabilities of €25.6m due within 12 months, and liabilities of €10.6m due beyond 12 months. Offsetting these obligations, it had cash of €9.82m as well as receivables valued at €18.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.05m.
Of course, LPKF Laser & Electronics has a market capitalization of €171.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, LPKF Laser & Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that LPKF Laser & Electronics grew its EBIT by 103% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LPKF Laser & Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While LPKF Laser & Electronics 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. Over the last two years, LPKF Laser & Electronics recorded free cash flow worth a fulsome 90% 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 look at a company's total liabilities, it is very reassuring that LPKF Laser & Electronics has €1.1m in net cash. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in €28m. So is LPKF Laser & Electronics's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in LPKF Laser & Electronics, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.