We Think LPKF Laser & Electronics (ETR:LPK) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies LPKF Laser & Electronics AG (ETR:LPK) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See 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. However, it also had €4.94m in cash, and so its net debt is €971.0k.

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 €30.6m due within 12 months and liabilities of €6.10m due beyond that. Offsetting this, it had €4.94m in cash and €17.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €14.3m.

Of course, LPKF Laser & Electronics has a market capitalization of €328.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, LPKF Laser & Electronics has a very light debt load indeed. 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 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.

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

Not only did LPKF Laser & Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €3.7m at the EBIT level. 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 €3.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - LPKF Laser & Electronics has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.