Is LPKF Laser & Electronics (ETR:LPK) 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.' 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. Importantly, LPKF Laser & Electronics AG (ETR:LPK) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for LPKF Laser & Electronics

What Is LPKF Laser & Electronics's Debt?

The image below, which you can click on for greater detail, shows that LPKF Laser & Electronics had debt of €4.60m at the end of March 2021, a reduction from €6.28m over a year. But on the other hand it also has €17.8m in cash, leading to a €13.2m net cash position.

How Strong Is LPKF Laser & Electronics' Balance Sheet?

According to the last reported balance sheet, LPKF Laser & Electronics had liabilities of €24.3m due within 12 months, and liabilities of €6.55m due beyond 12 months. Offsetting these obligations, it had cash of €17.8m as well as receivables valued at €11.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.58m.

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 it's very unlikely that the €596.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, LPKF Laser & Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for LPKF Laser & Electronics if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LPKF Laser & Electronics'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, LPKF Laser & Electronics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that LPKF Laser & Electronics has €13.2m in net cash. And it impressed us with free cash flow of €2.6m, being 131% of its EBIT. So we are not troubled with LPKF Laser & Electronics's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in LPKF Laser & Electronics, you may well want to click here to check an interactive graph of its earnings per share history.

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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