Is LXRandCo (TSE:LXR) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that LXRandCo, Inc. (TSE:LXR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for LXRandCo

What Is LXRandCo's Debt?

As you can see below, at the end of September 2021, LXRandCo had CA$6.27m of debt, up from CA$5.17m a year ago. Click the image for more detail. On the flip side, it has CA$2.60m in cash leading to net debt of about CA$3.67m.

How Strong Is LXRandCo's Balance Sheet?

We can see from the most recent balance sheet that LXRandCo had liabilities of CA$3.77m falling due within a year, and liabilities of CA$7.30m due beyond that. Offsetting these obligations, it had cash of CA$2.60m as well as receivables valued at CA$2.91m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$5.54m.

While this might seem like a lot, it is not so bad since LXRandCo has a market capitalization of CA$12.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is LXRandCo's earnings that will influence how the balance sheet holds up in the future. 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$15m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While LXRandCo's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$3.8m. 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. However, it doesn't help that it burned through CA$5.7m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for LXRandCo you should be aware of, and 3 of them shouldn't be ignored.

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.