Would Lucapa Diamond (ASX:LOM) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Lucapa Diamond Company Limited (ASX:LOM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Lucapa Diamond

What Is Lucapa Diamond's Debt?

As you can see below, Lucapa Diamond had US$21.4m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$4.46m in cash leading to net debt of about US$16.9m.

How Healthy Is Lucapa Diamond's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lucapa Diamond had liabilities of US$7.96m due within 12 months and liabilities of US$20.0m due beyond that. On the other hand, it had cash of US$4.46m and US$1.45m worth of receivables due within a year. So it has liabilities totalling US$22.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$34.0m, so it does suggest shareholders should keep an eye on Lucapa Diamond's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Lucapa Diamond's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Lucapa Diamond wasn't profitable at an EBIT level, but managed to grow its revenue by 131%, to US$14m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Lucapa Diamond managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$4.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$5.2m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Take risks, for example - Lucapa Diamond has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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. 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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