Is Lamda Development (ATH:LAMDA) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Lamda Development S.A. (ATH:LAMDA) does carry 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. 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. 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 Lamda Development

How Much Debt Does Lamda Development Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Lamda Development had debt of €1.16b, up from €751.6m in one year. However, because it has a cash reserve of €452.3m, its net debt is less, at about €710.1m.

How Strong Is Lamda Development's Balance Sheet?

We can see from the most recent balance sheet that Lamda Development had liabilities of €622.9m falling due within a year, and liabilities of €2.28b due beyond that. Offsetting these obligations, it had cash of €452.3m as well as receivables valued at €115.7m due within 12 months. So its liabilities total €2.34b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €1.07b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Lamda Development would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lamda Development'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.

In the last year Lamda Development wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to €108m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. Indeed, it lost €10m at the EBIT level. 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. Not least because it had negative free cash flow of €39m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Lamda Development that 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.