Is Light Science Technologies Holdings (LON:LST) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Light Science Technologies Holdings Plc (LON:LST) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Light Science Technologies Holdings

What Is Light Science Technologies Holdings's Debt?

As you can see below, Light Science Technologies Holdings had UK£1.96m of debt at November 2023, down from UK£2.41m a year prior. However, it also had UK£981.4k in cash, and so its net debt is UK£978.9k.

How Strong Is Light Science Technologies Holdings' Balance Sheet?

The latest balance sheet data shows that Light Science Technologies Holdings had liabilities of UK£4.12m due within a year, and liabilities of UK£1.74m falling due after that. On the other hand, it had cash of UK£981.4k and UK£2.19m worth of receivables due within a year. So it has liabilities totalling UK£2.69m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Light Science Technologies Holdings is worth UK£8.99m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Light Science Technologies Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Light Science Technologies Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to UK£9.3m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Light Science Technologies Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at UK£605k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£436k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 2 warning signs for Light Science Technologies Holdings you should be aware of.

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.