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Linamar (TSE:LNR) Has A Rock Solid Balance Sheet

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  • LIMAF

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Linamar Corporation (TSE:LNR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, 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.

View our latest analysis for Linamar

What Is Linamar's Debt?

As you can see below, Linamar had CA$800.3m of debt at September 2021, down from CA$1.38b a year prior. But on the other hand it also has CA$806.0m in cash, leading to a CA$5.68m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Linamar's Balance Sheet?

We can see from the most recent balance sheet that Linamar had liabilities of CA$1.68b falling due within a year, and liabilities of CA$1.05b due beyond that. Offsetting these obligations, it had cash of CA$806.0m as well as receivables valued at CA$1.02b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$906.0m.

Of course, Linamar has a market capitalization of CA$4.63b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Linamar also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Linamar grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Linamar's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Linamar 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 three years, Linamar actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Linamar's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$5.68m. And it impressed us with free cash flow of CA$920m, being 133% of its EBIT. So is Linamar's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Linamar (including 1 which doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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