Learning Technologies Group (LON:LTG) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Learning Technologies Group plc (LON:LTG) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Learning Technologies Group

What Is Learning Technologies Group's Debt?

As you can see below, Learning Technologies Group had UK£18.4m of debt at December 2020, down from UK£38.2m a year prior. But it also has UK£88.6m in cash to offset that, meaning it has UK£70.2m net cash.

A Look At Learning Technologies Group's Liabilities

The latest balance sheet data shows that Learning Technologies Group had liabilities of UK£83.0m due within a year, and liabilities of UK£52.7m falling due after that. Offsetting these obligations, it had cash of UK£88.6m as well as receivables valued at UK£37.3m due within 12 months. So its liabilities total UK£9.89m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Learning Technologies Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£1.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Learning Technologies Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Learning Technologies Group has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Learning Technologies Group'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Learning Technologies Group 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. Happily for any shareholders, Learning Technologies Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Learning Technologies Group's liabilities, but we can be reassured by the fact it has has net cash of UK£70.2m. And it impressed us with free cash flow of UK£34m, being 163% of its EBIT. So we don't think Learning Technologies Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Learning Technologies Group you should be aware of.

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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