We Think Lanakam (ATH:LANAC) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Lanakam S.A. (ATH:LANAC) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lanakam

How Much Debt Does Lanakam Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Lanakam had €1.59m of debt, an increase on €1.00m, over one year. However, because it has a cash reserve of €167.7k, its net debt is less, at about €1.42m.

How Healthy Is Lanakam's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lanakam had liabilities of €2.39m due within 12 months and liabilities of €1.86m due beyond that. Offsetting these obligations, it had cash of €167.7k as well as receivables valued at €492.5k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.59m.

Lanakam has a market capitalization of €6.18m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lanakam 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 Lanakam wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to €1.7m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Lanakam produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €361k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €563k of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Lanakam you should be aware of, and 3 of them make us uncomfortable.

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.

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.

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