We Think lastminute.com (VTX:LMN) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that lastminute.com N.V. (VTX:LMN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for lastminute.com

What Is lastminute.com's Debt?

The image below, which you can click on for greater detail, shows that lastminute.com had debt of €19.6m at the end of June 2024, a reduction from €63.4m over a year. But on the other hand it also has €153.4m in cash, leading to a €133.8m net cash position.

How Strong Is lastminute.com's Balance Sheet?

We can see from the most recent balance sheet that lastminute.com had liabilities of €504.7m falling due within a year, and liabilities of €46.4m due beyond that. On the other hand, it had cash of €153.4m and €164.6m worth of receivables due within a year. So it has liabilities totalling €233.1m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €201.5m, we think shareholders really should watch lastminute.com's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. lastminute.com boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

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 €19m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if lastminute.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. lastminute.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, lastminute.com actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although lastminute.com's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €133.8m. And it impressed us with free cash flow of €47m, being 252% of its EBIT. So we don't have any problem with lastminute.com's use of debt. 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 2 warning signs for lastminute.com 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.