Is LS telcom (ETR:LSX) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that LS telcom AG (ETR:LSX) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for LS telcom

What Is LS telcom's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 LS telcom had debt of €12.3m, up from €4.91m in one year. However, it also had €10.1m in cash, and so its net debt is €2.24m.

A Look At LS telcom's Liabilities

According to the last reported balance sheet, LS telcom had liabilities of €12.5m due within 12 months, and liabilities of €12.8m due beyond 12 months. Offsetting these obligations, it had cash of €10.1m as well as receivables valued at €5.12m due within 12 months. So it has liabilities totalling €10.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because LS telcom is worth €48.1m, and thus could probably raise enough capital to shore up 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine LS telcom's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year LS telcom had a loss before interest and tax, and actually shrunk its revenue by 15%, to €29m. We would much prefer see growth.

Caveat Emptor

While LS telcom's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €2.3m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €2.7m into a profit. So to be blunt we do think it is 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 instance, we've identified 1 warning sign for LS telcom that 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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