Is L.D.C (EPA:LOUP) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that L.D.C. S.A. (EPA:LOUP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for L.D.C

How Much Debt Does L.D.C Carry?

As you can see below, at the end of August 2021, L.D.C had €446.8m of debt, up from €427.3m a year ago. Click the image for more detail. However, it does have €589.7m in cash offsetting this, leading to net cash of €142.8m.

A Look At L.D.C's Liabilities

The latest balance sheet data shows that L.D.C had liabilities of €1.20b due within a year, and liabilities of €269.5m falling due after that. Offsetting these obligations, it had cash of €589.7m as well as receivables valued at €582.2m due within 12 months. So its liabilities total €297.8m more than the combination of its cash and short-term receivables.

Given L.D.C has a market capitalization of €1.73b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, L.D.C boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, L.D.C grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if L.D.C can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. L.D.C may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, L.D.C recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although L.D.C's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €142.8m. On top of that, it increased its EBIT by 5.1% in the last twelve months. So we are not troubled with L.D.C's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for L.D.C you should know about.

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.