Lucara Diamond (TSE:LUC) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Lucara Diamond Corp. (TSE:LUC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Lucara Diamond

What Is Lucara Diamond's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Lucara Diamond had US$20.0m of debt, an increase on none, over one year. However, it does have US$10.1m in cash offsetting this, leading to net debt of about US$9.94m.

A Look At Lucara Diamond's Liabilities

According to the last reported balance sheet, Lucara Diamond had liabilities of US$33.9m due within 12 months, and liabilities of US$76.3m due beyond 12 months. On the other hand, it had cash of US$10.1m and US$7.30m worth of receivables due within a year. So its liabilities total US$92.8m more than the combination of its cash and short-term receivables.

Lucara Diamond has a market capitalization of US$168.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Lucara Diamond's ability to maintain a healthy balance sheet going forward. 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, Lucara Diamond made a loss at the EBIT level, and saw its revenue drop to US$139m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

While Lucara Diamond'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 US$14m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$12m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Lucara Diamond insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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