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Lena Gold-Mining Lenzoloto (MCX:LNZL) Has A Rock Solid Balance Sheet

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Simply Wall St
·4 min read
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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. 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 Lena Gold-Mining Public Joint Stock Company Lenzoloto (MCX:LNZL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lena Gold-Mining Lenzoloto

What Is Lena Gold-Mining Lenzoloto's Debt?

As you can see below, Lena Gold-Mining Lenzoloto had ₽1.30b of debt at June 2019, down from ₽2.64b a year prior. However, it does have ₽9.47b in cash offsetting this, leading to net cash of ₽8.17b.

MISX:LNZL Historical Debt April 24th 2020
MISX:LNZL Historical Debt April 24th 2020

How Healthy Is Lena Gold-Mining Lenzoloto's Balance Sheet?

The latest balance sheet data shows that Lena Gold-Mining Lenzoloto had liabilities of ₽3.43b due within a year, and liabilities of ₽1.85b falling due after that. On the other hand, it had cash of ₽9.47b and ₽1.03b worth of receivables due within a year. So it can boast ₽5.22b more liquid assets than total liabilities.

This surplus liquidity suggests that Lena Gold-Mining Lenzoloto's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Lena Gold-Mining Lenzoloto boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Lena Gold-Mining Lenzoloto grew its EBIT by 352% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Lena Gold-Mining Lenzoloto's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lena Gold-Mining Lenzoloto 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. Looking at the most recent three years, Lena Gold-Mining Lenzoloto recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Lena Gold-Mining Lenzoloto has ₽8.17b in net cash and a decent-looking balance sheet. And we liked the look of last year's 352% year-on-year EBIT growth. So is Lena Gold-Mining Lenzoloto's debt a risk? It doesn't seem so to us. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Lena Gold-Mining Lenzoloto (of which 1 is concerning!) you should know about.

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.