We Think LXRandCo (TSE:LXR) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that LXRandCo, Inc. (TSE:LXR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 LXRandCo

What Is LXRandCo's Debt?

As you can see below, LXRandCo had CA$4.81m of debt at March 2021, down from CA$6.01m a year prior. However, it also had CA$4.65m in cash, and so its net debt is CA$160.7k.

A Look At LXRandCo's Liabilities

We can see from the most recent balance sheet that LXRandCo had liabilities of CA$3.95m falling due within a year, and liabilities of CA$5.61m due beyond that. On the other hand, it had cash of CA$4.65m and CA$2.08m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.82m.

While this might seem like a lot, it is not so bad since LXRandCo has a market capitalization of CA$10.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year LXRandCo had a loss before interest and tax, and actually shrunk its revenue by 73%, to CA$10m. 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. Indeed, it lost a very considerable CA$3.8m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.9m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for LXRandCo you should be aware of.

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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