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Health Check: How Prudently Does LSB Industries (NYSE:LXU) Use Debt?

Simply Wall St

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies LSB Industries, Inc. (NYSE:LXU) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for LSB Industries

What Is LSB Industries's Debt?

The image below, which you can click on for greater detail, shows that at June 2019 LSB Industries had debt of US$460.1m, up from US$418.8m in one year. However, it does have US$58.0m in cash offsetting this, leading to net debt of about US$402.1m.

NYSE:LXU Historical Debt, August 6th 2019

A Look At LSB Industries's Liabilities

Zooming in on the latest balance sheet data, we can see that LSB Industries had liabilities of US$85.5m due within 12 months and liabilities of US$515.7m due beyond that. Offsetting this, it had US$58.0m in cash and US$52.2m in receivables that were due within 12 months. So it has liabilities totalling US$491.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$147.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, LSB Industries would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine LSB Industries'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.

Over 12 months, LSB Industries saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months LSB Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$8.4m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$30m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. For riskier companies like LSB Industries I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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 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. Thank you for reading.