Is LXRandCo (TSE:LXR) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies LXRandCo, Inc. (TSE:LXR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for LXRandCo

How Much Debt Does LXRandCo Carry?

As you can see below, LXRandCo had CA$4.43m of debt at December 2020, down from CA$8.04m a year prior. However, its balance sheet shows it holds CA$7.29m in cash, so it actually has CA$2.86m net cash.

How Healthy Is LXRandCo's Balance Sheet?

According to the last reported balance sheet, LXRandCo had liabilities of CA$3.93m due within 12 months, and liabilities of CA$6.85m due beyond 12 months. Offsetting these obligations, it had cash of CA$7.29m as well as receivables valued at CA$1.73m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.76m.

Since publicly traded LXRandCo shares are worth a total of CA$11.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, LXRandCo also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LXRandCo will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, LXRandCo made a loss at the EBIT level, and saw its revenue drop to CA$14m, which is a fall of 66%. To be frank that doesn't bode well.

So How Risky Is LXRandCo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that LXRandCo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$1.5m of cash and made a loss of CA$7.7m. Given it only has net cash of CA$2.86m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that LXRandCo is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade LXRandCo, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.