Is Lenzing (VIE:LNZ) Using Debt In A Risky Way?

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. As with many other companies Lenzing Aktiengesellschaft (VIE:LNZ) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, at the end of March 2023, Lenzing had €2.43b of debt, up from €2.22b a year ago. Click the image for more detail. On the flip side, it has €434.8m in cash leading to net debt of about €1.99b.

A Look At Lenzing's Liabilities

We can see from the most recent balance sheet that Lenzing had liabilities of €948.5m falling due within a year, and liabilities of €2.60b due beyond that. On the other hand, it had cash of €434.8m and €325.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.79b.

This deficit casts a shadow over the €1.60b 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Lenzing wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €2.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Lenzing had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €84m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €772m in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 3 warning signs with Lenzing (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

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