Is lastminute.com (VTX:LMN) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies lastminute.com N.V. (VTX:LMN) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for lastminute.com

How Much Debt Does lastminute.com Carry?

You can click the graphic below for the historical numbers, but it shows that lastminute.com had €63.0m of debt in June 2022, down from €91.0m, one year before. But it also has €228.8m in cash to offset that, meaning it has €165.8m net cash.

How Healthy Is lastminute.com's Balance Sheet?

According to the last reported balance sheet, lastminute.com had liabilities of €471.2m due within 12 months, and liabilities of €67.5m due beyond 12 months. Offsetting this, it had €228.8m in cash and €133.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €176.8m.

This is a mountain of leverage relative to its market capitalization of €224.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, lastminute.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, lastminute.com turned things around in the last 12 months, delivering and EBIT of €22m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since lastminute.com 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While lastminute.com has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, lastminute.com actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While lastminute.com does have more liabilities than liquid assets, it also has net cash of €165.8m. The cherry on top was that in converted 500% of that EBIT to free cash flow, bringing in €108m. So we are not troubled with lastminute.com's debt use. 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 - lastminute.com has 1 warning sign we think you should be aware of.

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.

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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.