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We Think Lumentum Holdings (NASDAQ:LITE) Can Manage Its Debt With Ease

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Simply Wall St
·4 min read
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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.' 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. As with many other companies Lumentum Holdings Inc. (NASDAQ:LITE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Lumentum Holdings

How Much Debt Does Lumentum Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Lumentum Holdings had US$1.12b of debt, an increase on US$840.9m, over one year. But it also has US$1.55b in cash to offset that, meaning it has US$433.5m net cash.

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

A Look At Lumentum Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Lumentum Holdings had liabilities of US$283.0m due within 12 months and liabilities of US$1.26b due beyond that. Offsetting this, it had US$1.55b in cash and US$234.6m in receivables that were due within 12 months. So it can boast US$245.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Lumentum Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lumentum Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Lumentum Holdings grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Lumentum Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lumentum Holdings 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. Over the last three years, Lumentum Holdings 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

While it is always sensible to investigate a company's debt, in this case Lumentum Holdings has US$433.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$434m, being 138% of its EBIT. So is Lumentum Holdings'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Lumentum Holdings that you should be aware of.

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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.