Is Lenzing (VIE:LNZ) A Risky Investment?

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. We note that Lenzing Aktiengesellschaft (VIE:LNZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lenzing

What Is Lenzing's Net Debt?

The image below, which you can click on for greater detail, shows that Lenzing had debt of €2.34b at the end of September 2024, a reduction from €2.47b over a year. However, because it has a cash reserve of €839.6m, its net debt is less, at about €1.50b.

How Strong Is Lenzing's Balance Sheet?

We can see from the most recent balance sheet that Lenzing had liabilities of €1.31b falling due within a year, and liabilities of €2.27b due beyond that. On the other hand, it had cash of €839.6m and €248.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.48b.

This deficit casts a shadow over the €1.10b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Lenzing would likely require a major re-capitalisation if it had to pay its creditors today. 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 Lenzing 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.

Over 12 months, Lenzing reported revenue of €2.6b, which is a gain of 6.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Lenzing had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €26m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €636m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Lenzing , and understanding them should be part of your investment process.

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.

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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.