Is Lamda Development (ATH:LAMDA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Lamda Development S.A. (ATH:LAMDA) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lamda Development

What Is Lamda Development's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Lamda Development had debt of €1.19b, up from €720.3m in one year. However, because it has a cash reserve of €477.5m, its net debt is less, at about €711.2m.

A Look At Lamda Development's Liabilities

Zooming in on the latest balance sheet data, we can see that Lamda Development had liabilities of €1.02b due within 12 months and liabilities of €2.00b due beyond that. On the other hand, it had cash of €477.5m and €112.4m worth of receivables due within a year. So it has liabilities totalling €2.43b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €1.11b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Lamda Development would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lamda Development can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Lamda Development wasn't profitable at an EBIT level, but managed to grow its revenue by 119%, to €225m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Lamda Development managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at €13m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of €9.2m and free cash flow of €162m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 2 warning signs with Lamda Development (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.