Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that LEONI AG (ETR:LEO) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is LEONI's Net Debt?
The chart below, which you can click on for greater detail, shows that LEONI had €1.44b in debt in March 2021; about the same as the year before. On the flip side, it has €247.8m in cash leading to net debt of about €1.19b.
How Strong Is LEONI's Balance Sheet?
According to the last reported balance sheet, LEONI had liabilities of €1.39b due within 12 months, and liabilities of €1.96b due beyond 12 months. Offsetting these obligations, it had cash of €247.8m as well as receivables valued at €728.3m due within 12 months. So its liabilities total €2.37b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €525.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, LEONI would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LEONI can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year LEONI had a loss before interest and tax, and actually shrunk its revenue by 7.5%, to €4.4b. That's not what we would hope to see.
Over the last twelve months LEONI produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €157m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €183m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for LEONI you should know about.
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.
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