Is Lark Distilling (ASX:LRK) A Risky Investment?

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.' 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 Lark Distilling Co. Ltd (ASX:LRK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lark Distilling

What Is Lark Distilling's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Lark Distilling had AU$5.00m of debt, an increase on AU$177.1k, over one year. However, its balance sheet shows it holds AU$11.9m in cash, so it actually has AU$6.92m net cash.

A Look At Lark Distilling's Liabilities

The latest balance sheet data shows that Lark Distilling had liabilities of AU$2.46m due within a year, and liabilities of AU$5.19m falling due after that. Offsetting this, it had AU$11.9m in cash and AU$1.45m in receivables that were due within 12 months. So it can boast AU$5.72m more liquid assets than total liabilities.

This surplus suggests that Lark Distilling has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Lark Distilling has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lark Distilling's ability to maintain a healthy balance sheet going forward. 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, Lark Distilling reported revenue of AU$11m, which is a gain of 67%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Lark Distilling?

While Lark Distilling lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of AU$13k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 67% is a good sign. We'd see further strong growth as an optimistic indication. 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 example, we've discovered 3 warning signs for Lark Distilling that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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