These 4 Measures Indicate That L.D.C (EPA:LOUP) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for L.D.C

What Is L.D.C's Net Debt?

You can click the graphic below for the historical numbers, but it shows that L.D.C had €427.3m of debt in August 2020, down from €543.0m, one year before. But on the other hand it also has €536.9m in cash, leading to a €109.6m net cash position.

How Healthy Is L.D.C's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that L.D.C had liabilities of €1.04b due within 12 months and liabilities of €328.7m due beyond that. Offsetting this, it had €536.9m in cash and €503.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €329.9m.

Of course, L.D.C has a market capitalization of €1.69b, 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. Despite its noteworthy liabilities, L.D.C boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that L.D.C grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, L.D.C's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While L.D.C does have more liabilities than liquid assets, it also has net cash of €109.6m. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with L.D.C's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in L.D.C, you may well want to click here to check an interactive graph of its earnings per share history.

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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