We Think Light Science Technologies Holdings (LON:LST) Has A Fair Chunk Of Debt

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.' 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. As with many other companies Light Science Technologies Holdings Plc (LON:LST) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Light Science Technologies Holdings

What Is Light Science Technologies Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of May 2024 Light Science Technologies Holdings had UK£2.46m of debt, an increase on UK£1.92m, over one year. On the flip side, it has UK£1.05m in cash leading to net debt of about UK£1.41m.

How Healthy Is Light Science Technologies Holdings' Balance Sheet?

We can see from the most recent balance sheet that Light Science Technologies Holdings had liabilities of UK£4.66m falling due within a year, and liabilities of UK£2.24m due beyond that. Offsetting these obligations, it had cash of UK£1.05m as well as receivables valued at UK£3.05m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.79m.

Light Science Technologies Holdings has a market capitalization of UK£7.33m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Light Science Technologies Holdings reported revenue of UK£10m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Light Science Technologies Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£111k at the EBIT level. 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£379k of cash over the last year. So suffice it to say we consider the stock very 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. Be aware that Light Science Technologies Holdings is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.