Is lastminute.com (VTX:LMN) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that lastminute.com N.V. (VTX:LMN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for lastminute.com

What Is lastminute.com's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 lastminute.com had €94.0m of debt, an increase on €29.9m, over one year. But it also has €136.3m in cash to offset that, meaning it has €42.3m net cash.

A Look At lastminute.com's Liabilities

Zooming in on the latest balance sheet data, we can see that lastminute.com had liabilities of €284.8m due within 12 months and liabilities of €57.2m due beyond that. Offsetting this, it had €136.3m in cash and €73.7m in receivables that were due within 12 months. So its liabilities total €131.9m more than the combination of its cash and short-term receivables.

lastminute.com has a market capitalization of €255.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine lastminute.com'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.

Over 12 months, lastminute.com made a loss at the EBIT level, and saw its revenue drop to €254m, which is a fall of 20%. That makes us nervous, to say the least.

So How Risky Is lastminute.com?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that lastminute.com had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €41m and booked a €10m accounting loss. Given it only has net cash of €42.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for lastminute.com (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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