Lingotes Especiales (BME:LGT) Is Making Moderate Use Of 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.' 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 Lingotes Especiales, S.A. (BME:LGT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Lingotes Especiales

What Is Lingotes Especiales's Net Debt?

As you can see below, at the end of June 2022, Lingotes Especiales had €25.0m of debt, up from €20.3m a year ago. Click the image for more detail. However, because it has a cash reserve of €4.63m, its net debt is less, at about €20.4m.

A Look At Lingotes Especiales' Liabilities

Zooming in on the latest balance sheet data, we can see that Lingotes Especiales had liabilities of €36.8m due within 12 months and liabilities of €19.9m due beyond that. Offsetting this, it had €4.63m in cash and €25.7m in receivables that were due within 12 months. So its liabilities total €26.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lingotes Especiales has a market capitalization of €64.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Lingotes Especiales'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.

In the last year Lingotes Especiales wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to €100m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Lingotes Especiales had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €4.5m 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 €4.7m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Lingotes Especiales (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.