Stock Analysis

Is Locality Planning Energy Holdings (ASX:LPE) Using Too Much Debt?

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ASX:LPE
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Locality Planning Energy Holdings Limited (ASX:LPE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Locality Planning Energy Holdings

What Is Locality Planning Energy Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Locality Planning Energy Holdings had AU$13.9m of debt, an increase on AU$7.80m, over one year. On the flip side, it has AU$4.96m in cash leading to net debt of about AU$8.93m.

debt-equity-history-analysis
ASX:LPE Debt to Equity History May 31st 2021

How Strong Is Locality Planning Energy Holdings' Balance Sheet?

We can see from the most recent balance sheet that Locality Planning Energy Holdings had liabilities of AU$9.15m falling due within a year, and liabilities of AU$15.0m due beyond that. Offsetting this, it had AU$4.96m in cash and AU$9.42m in receivables that were due within 12 months. So its liabilities total AU$9.76m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of AU$13.2m, so it does suggest shareholders should keep an eye on Locality Planning Energy Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Locality Planning Energy Holdings'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 Locality Planning Energy Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to AU$48m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Locality Planning Energy Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$1.7m 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$3.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 2 warning signs for Locality Planning Energy Holdings that you should be aware of before investing here.

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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