Does LPKF Laser & Electronics (ETR:LPK) 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.' 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. Importantly, LPKF Laser & Electronics AG (ETR:LPK) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for LPKF Laser & Electronics

What Is LPKF Laser & Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that LPKF Laser & Electronics had €5.35m of debt in September 2020, down from €8.09m, one year before. But on the other hand it also has €13.3m in cash, leading to a €7.95m net cash position.

A Look At LPKF Laser & Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that LPKF Laser & Electronics had liabilities of €16.6m due within 12 months and liabilities of €8.53m due beyond that. Offsetting this, it had €13.3m in cash and €17.7m in receivables that were due within 12 months. So it can boast €5.84m more liquid assets than total liabilities.

This state of affairs indicates that LPKF Laser & Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €653.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, LPKF Laser & Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that LPKF Laser & Electronics's load is not too heavy, because its EBIT was down 45% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LPKF Laser & Electronics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. LPKF Laser & Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, LPKF Laser & Electronics generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that LPKF Laser & Electronics has net cash of €7.95m, as well as more liquid assets than liabilities. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in -€80k. So we don't have any problem with LPKF Laser & Electronics's use of debt. 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. Case in point: We've spotted 2 warning signs for LPKF Laser & Electronics you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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