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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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 Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lenzing

What Is Lenzing's Net Debt?

The chart below, which you can click on for greater detail, shows that Lenzing had €2.47b in debt in September 2023; about the same as the year before. However, it also had €747.7m in cash, and so its net debt is €1.72b.

How Healthy Is Lenzing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lenzing had liabilities of €1.16b due within 12 months and liabilities of €2.46b due beyond that. Offsetting these obligations, it had cash of €747.7m as well as receivables valued at €322.4m due within 12 months. So its liabilities total €2.55b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €1.14b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Lenzing would likely require a major re-capitalisation if it had to pay its creditors today. 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 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 made a loss at the EBIT level, and saw its revenue drop to €2.5b, which is a fall of 4.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Lenzing had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €122m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €384m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Lenzing (including 2 which can't be ignored) .

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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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.