We Think Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

How Much Debt Does Lexibook - Linguistic Electronic System Société anonyme Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Lexibook - Linguistic Electronic System Société anonyme had debt of €6.15m, up from €4.96m in one year. However, because it has a cash reserve of €3.46m, its net debt is less, at about €2.70m.

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

The latest balance sheet data shows that Lexibook - Linguistic Electronic System Société anonyme had liabilities of €7.49m due within a year, and liabilities of €4.16m falling due after that. On the other hand, it had cash of €3.46m and €3.72m worth of receivables due within a year. So its liabilities total €4.47m more than the combination of its cash and short-term receivables.

Of course, Lexibook - Linguistic Electronic System Société anonyme has a market capitalization of €32.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.88 and interest cover of 7.0 times, it seems to us that Lexibook - Linguistic Electronic System Société anonyme is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Better yet, Lexibook - Linguistic Electronic System Société anonyme grew its EBIT by 1,852% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lexibook - Linguistic Electronic System Société anonyme will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, Lexibook - Linguistic Electronic System Société anonyme actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Lexibook - Linguistic Electronic System Société anonyme's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Considering this range of factors, it seems to us that Lexibook - Linguistic Electronic System Société anonyme is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. 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. We've identified 3 warning signs with Lexibook - Linguistic Electronic System Société anonyme , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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