Is LPKF Laser & Electronics (ETR:LPK) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies LPKF Laser & Electronics AG (ETR:LPK) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LPKF Laser & Electronics

How Much Debt Does LPKF Laser & Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 LPKF Laser & Electronics had €5.91m of debt, an increase on €5.35m, over one year. On the flip side, it has €4.94m in cash leading to net debt of about €971.0k.

How Strong Is LPKF Laser & Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LPKF Laser & Electronics had liabilities of €30.6m due within 12 months and liabilities of €6.10m due beyond that. Offsetting these obligations, it had cash of €4.94m as well as receivables valued at €17.5m due within 12 months. So its liabilities total €14.3m more than the combination of its cash and short-term receivables.

Given LPKF Laser & Electronics has a market capitalization of €514.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, LPKF Laser & Electronics has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 LPKF Laser & Electronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, LPKF Laser & Electronics made a loss at the EBIT level, and saw its revenue drop to €87m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While LPKF Laser & Electronics'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 €3.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €3.7m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like LPKF Laser & Electronics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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