Is Lendlease Group (ASX:LLC) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Lendlease Group (ASX:LLC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lendlease Group

What Is Lendlease Group's Debt?

As you can see below, Lendlease Group had AU$2.40b of debt at June 2020, down from AU$2.72b a year prior. However, it does have AU$1.11b in cash offsetting this, leading to net debt of about AU$1.28b.

A Look At Lendlease Group's Liabilities

According to the last reported balance sheet, Lendlease Group had liabilities of AU$5.65b due within 12 months, and liabilities of AU$5.16b due beyond 12 months. Offsetting these obligations, it had cash of AU$1.11b as well as receivables valued at AU$1.69b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$8.01b.

This is a mountain of leverage relative to its market capitalization of AU$8.88b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Lendlease Group 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 Lendlease Group had a loss before interest and tax, and actually shrunk its revenue by 21%, to AU$12b. That makes us nervous, to say the least.

Caveat Emptor

While Lendlease Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at AU$617m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$52m of cash over the last year. So to be blunt we think it is risky. 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. Take risks, for example - Lendlease Group has 2 warning signs we think you should be aware of.

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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