Is LBT Innovations (ASX:LBT) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that LBT Innovations Limited (ASX:LBT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for LBT Innovations

How Much Debt Does LBT Innovations Carry?

The image below, which you can click on for greater detail, shows that LBT Innovations had debt of AU$2.46m at the end of June 2022, a reduction from AU$2.94m over a year. However, its balance sheet shows it holds AU$2.79m in cash, so it actually has AU$324.0k net cash.

A Look At LBT Innovations' Liabilities

The latest balance sheet data shows that LBT Innovations had liabilities of AU$2.86m due within a year, and liabilities of AU$7.33m falling due after that. On the other hand, it had cash of AU$2.79m and AU$3.21m worth of receivables due within a year. So its liabilities total AU$4.19m more than the combination of its cash and short-term receivables.

Given LBT Innovations has a market capitalization of AU$28.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, LBT Innovations also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LBT Innovations will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, LBT Innovations reported revenue of AU$2.1m, which is a gain of 89%, 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 LBT Innovations?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that LBT Innovations had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$5.6m and booked a AU$6.6m accounting loss. But at least it has AU$324.0k on the balance sheet to spend on growth, near-term. LBT Innovations's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for LBT Innovations you should be aware of, and 2 of them are concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.