Lendlease Group (ASX:LLC) Has Debt But No Earnings; Should You Worry?

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?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lendlease Group

What Is Lendlease Group's Net Debt?

The image below, which you can click on for greater detail, shows that Lendlease Group had debt of AU$2.54b at the end of December 2021, a reduction from AU$2.72b over a year. However, it does have AU$842.0m in cash offsetting this, leading to net debt of about AU$1.70b.

How Strong Is Lendlease Group's Balance Sheet?

We can see from the most recent balance sheet that Lendlease Group had liabilities of AU$4.78b falling due within a year, and liabilities of AU$4.78b due beyond that. Offsetting these obligations, it had cash of AU$842.0m as well as receivables valued at AU$1.76b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$6.97b.

This deficit is considerable relative to its market capitalization of AU$7.55b, 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 it is future earnings, more than anything, that will determine Lendlease Group's ability to maintain a healthy balance sheet going forward. 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 2.9%, to AU$9.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Lendlease Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$183m at the EBIT level. 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. Another cause for caution is that is bled AU$46m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Lendlease Group's profit, revenue, and operating cashflow have changed over the last few years.

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. 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.