Does LS telcom (ETR:LSX) Have A Healthy Balance Sheet?

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.' 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. We can see that LS telcom AG (ETR:LSX) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

What Is LS telcom's Debt?

The image below, which you can click on for greater detail, shows that LS telcom had debt of €11.3m at the end of March 2025, a reduction from €14.6m over a year. However, it does have €2.05m in cash offsetting this, leading to net debt of about €9.24m.

How Healthy Is LS telcom's Balance Sheet?

We can see from the most recent balance sheet that LS telcom had liabilities of €12.0m falling due within a year, and liabilities of €14.1m due beyond that. On the other hand, it had cash of €2.05m and €10.5m worth of receivables due within a year. So its liabilities total €13.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €20.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if LS telcom 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.

See our latest analysis for LS telcom

In the last year LS telcom had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to €41m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months LS telcom produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €2.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €2.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - LS telcom has 3 warning signs 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.