Lectra (EPA:LSS) Has A Rock Solid Balance Sheet

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 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 Lectra SA (EPA:LSS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lectra

What Is Lectra's Net Debt?

The image below, which you can click on for greater detail, shows that Lectra had debt of €119.0m at the end of March 2023, a reduction from €139.4m over a year. But it also has €126.8m in cash to offset that, meaning it has €7.80m net cash.

A Look At Lectra's Liabilities

The latest balance sheet data shows that Lectra had liabilities of €237.2m due within a year, and liabilities of €183.2m falling due after that. Offsetting this, it had €126.8m in cash and €94.8m in receivables that were due within 12 months. So its liabilities total €198.8m more than the combination of its cash and short-term receivables.

Of course, Lectra has a market capitalization of €1.07b, 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. Despite its noteworthy liabilities, Lectra boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Lectra has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lectra's ability to maintain a healthy balance sheet going forward. 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. While Lectra has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Lectra recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Lectra's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.80m. And it impressed us with free cash flow of €54m, being 93% of its EBIT. So is Lectra's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Lectra, 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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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.