Does Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lexibook - Linguistic Electronic System Société anonyme

What Is Lexibook - Linguistic Electronic System Société anonyme's Net Debt?

As you can see below, at the end of September 2021, Lexibook - Linguistic Electronic System Société anonyme had €12.1m of debt, up from €10.0m a year ago. Click the image for more detail. However, it also had €1.55m in cash, and so its net debt is €10.5m.

A Look At Lexibook - Linguistic Electronic System Société anonyme's Liabilities

We can see from the most recent balance sheet that Lexibook - Linguistic Electronic System Société anonyme had liabilities of €19.0m falling due within a year, and liabilities of €3.77m due beyond that. Offsetting this, it had €1.55m in cash and €9.33m in receivables that were due within 12 months. So its liabilities total €11.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Lexibook - Linguistic Electronic System Société anonyme is worth €36.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Lexibook - Linguistic Electronic System Société anonyme's net debt is 2.5 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 11.5 times its interest expense, implying the company isn't really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Notably, Lexibook - Linguistic Electronic System Société anonyme's EBIT launched higher than Elon Musk, gaining a whopping 1,191% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lexibook - Linguistic Electronic System Société anonyme will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Lexibook - Linguistic Electronic System Société anonyme burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Lexibook - Linguistic Electronic System Société anonyme is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Lexibook - Linguistic Electronic System Société anonyme's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Lexibook - Linguistic Electronic System Société anonyme you should be aware of, and 2 of them are potentially serious.

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.