Is Lalique Group (VTX:LLQ) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lalique Group SA (VTX:LLQ) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lalique Group

What Is Lalique Group's Net Debt?

As you can see below, at the end of December 2020, Lalique Group had €48.0m of debt, up from €42.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds €66.7m in cash, so it actually has €18.7m net cash.

How Healthy Is Lalique Group's Balance Sheet?

According to the last reported balance sheet, Lalique Group had liabilities of €85.5m due within 12 months, and liabilities of €78.9m due beyond 12 months. Offsetting this, it had €66.7m in cash and €21.7m in receivables that were due within 12 months. So its liabilities total €76.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lalique Group has a market capitalization of €226.2m, 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. Despite its noteworthy liabilities, Lalique Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lalique Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Lalique Group had a loss before interest and tax, and actually shrunk its revenue by 23%, to €109m. That makes us nervous, to say the least.

So How Risky Is Lalique Group?

Although Lalique Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €10m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Lalique Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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