Is Lantronix (NASDAQ:LTRX) Weighed On By Its Debt Load?
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lantronix, Inc. (NASDAQ:LTRX) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Lantronix
What Is Lantronix's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Lantronix had debt of US$16.4m, up from US$4.05m in one year. However, its balance sheet shows it holds US$22.8m in cash, so it actually has US$6.42m net cash.
How Strong Is Lantronix's Balance Sheet?
According to the last reported balance sheet, Lantronix had liabilities of US$33.3m due within 12 months, and liabilities of US$22.6m due beyond 12 months. On the other hand, it had cash of US$22.8m and US$25.2m worth of receivables due within a year. So its liabilities total US$7.95m more than the combination of its cash and short-term receivables.
Given Lantronix has a market capitalization of US$265.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Lantronix boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lantronix 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.
In the last year Lantronix wasn't profitable at an EBIT level, but managed to grow its revenue by 68%, to US$114m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Lantronix?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lantronix had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$5.6m and booked a US$9.0m accounting loss. However, it has net cash of US$6.42m, so it has a bit of time before it will need more capital. Lantronix's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 1 warning sign for Lantronix you should be aware of.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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