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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Logic Instrument S.A. (EPA:ALLOG) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Logic Instrument's Net Debt?
As you can see below, Logic Instrument had €360.1k of debt at June 2019, down from €515.6k a year prior. But on the other hand it also has €2.33m in cash, leading to a €1.97m net cash position.
How Healthy Is Logic Instrument's Balance Sheet?
According to the last reported balance sheet, Logic Instrument had liabilities of €2.67m due within 12 months, and liabilities of €589.0k due beyond 12 months. On the other hand, it had cash of €2.33m and €2.88m worth of receivables due within a year. So it can boast €1.95m more liquid assets than total liabilities.
This excess liquidity is a great indication that Logic Instrument's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Logic Instrument boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Logic Instrument will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Logic Instrument managed to grow its revenue by 7.6%, to €11m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Logic Instrument?
While Logic Instrument lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €1.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Logic Instrument's profit, revenue, and operating cashflow have changed over the last few years.
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 firstname.lastname@example.org. 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.