Does LED iBond International (CPH:LEDIBOND) Have A Healthy Balance Sheet?

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.' 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, LED iBond International A/S (CPH:LEDIBOND) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LED iBond International

How Much Debt Does LED iBond International Carry?

You can click the graphic below for the historical numbers, but it shows that LED iBond International had kr.11.9m of debt in December 2020, down from kr.15.6m, one year before. However, it does have kr.9.86m in cash offsetting this, leading to net debt of about kr.2.09m.

How Strong Is LED iBond International's Balance Sheet?

The latest balance sheet data shows that LED iBond International had liabilities of kr.12.3m due within a year, and liabilities of kr.9.91m falling due after that. Offsetting these obligations, it had cash of kr.9.86m as well as receivables valued at kr.5.26m due within 12 months. So it has liabilities totalling kr.7.05m more than its cash and near-term receivables, combined.

Of course, LED iBond International has a market capitalization of kr.325.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, LED iBond International has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LED iBond International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, LED iBond International made a loss at the EBIT level, and saw its revenue drop to kr.7.4m, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

While LED iBond International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost kr.19m 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. However, it doesn't help that it burned through kr.20m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example LED iBond International has 5 warning signs (and 1 which is a bit concerning) we think you should know about.

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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