Is Lendlease Group (ASX:LLC) Using Too Much Debt?

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 can see that Lendlease Group (ASX:LLC) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lendlease Group

What Is Lendlease Group's Debt?

As you can see below, Lendlease Group had AU$2.36b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has AU$1.30b in cash leading to net debt of about AU$1.06b.

How Healthy Is Lendlease Group's Balance Sheet?

We can see from the most recent balance sheet that Lendlease Group had liabilities of AU$5.35b falling due within a year, and liabilities of AU$4.78b due beyond that. Offsetting these obligations, it had cash of AU$1.30b as well as receivables valued at AU$2.03b due within 12 months. So it has liabilities totalling AU$6.80b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of AU$6.93b, so it does suggest shareholders should keep an eye on Lendlease Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Lendlease Group 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, Lendlease Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Lendlease Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$920m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Lendlease Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.