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.' 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. As with many other companies Lithium Americas Corp. (TSE:LAC) 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Lithium Americas's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Lithium Americas had debt of US$85.4m, up from US$864.0k in one year. However, because it has a cash reserve of US$31.5m, its net debt is less, at about US$53.9m.
How Healthy Is Lithium Americas's Balance Sheet?
According to the last reported balance sheet, Lithium Americas had liabilities of US$4.62m due within 12 months, and liabilities of US$85.2m due beyond 12 months. Offsetting these obligations, it had cash of US$31.5m as well as receivables valued at US$2.20m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$56.1m.
Since publicly traded Lithium Americas shares are worth a total of US$317.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lithium Americas 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 Lithium Americas managed to grow its revenue by 63%, to US$5.7m. With any luck the company will be able to grow its way to profitability.
While we can certainly savour Lithium Americas's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost US$24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$22m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Lithium Americas insider transactions.
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.
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