London & Associated Properties (LON:LAS) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, London & Associated Properties PLC (LON:LAS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for London & Associated Properties

What Is London & Associated Properties's Net Debt?

As you can see below, London & Associated Properties had UK£41.6m of debt at June 2020, down from UK£59.1m a year prior. However, it does have UK£9.55m in cash offsetting this, leading to net debt of about UK£32.1m.

How Healthy Is London & Associated Properties's Balance Sheet?

We can see from the most recent balance sheet that London & Associated Properties had liabilities of UK£24.8m falling due within a year, and liabilities of UK£38.4m due beyond that. On the other hand, it had cash of UK£9.55m and UK£9.03m worth of receivables due within a year. So its liabilities total UK£44.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the UK£9.39m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, London & Associated Properties would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is London & Associated Properties's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given it has no significant operating revenue at the moment, shareholders will be hoping London & Associated Properties can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While London & Associated Properties's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable UK£2.4m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of UK£6.1m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with London & Associated Properties (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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. 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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