Is Lesico (TLV:LSCO) Using Debt Sensibly?

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 note that Lesico Ltd. (TLV:LSCO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lesico

How Much Debt Does Lesico Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Lesico had ₪97.6m of debt, an increase on ₪82.4m, over one year. However, its balance sheet shows it holds ₪129.6m in cash, so it actually has ₪32.0m net cash.

How Strong Is Lesico's Balance Sheet?

The latest balance sheet data shows that Lesico had liabilities of ₪310.0m due within a year, and liabilities of ₪71.4m falling due after that. Offsetting these obligations, it had cash of ₪129.6m as well as receivables valued at ₪302.4m due within 12 months. So it can boast ₪50.7m more liquid assets than total liabilities.

This surplus suggests that Lesico is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Lesico boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lesico 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.

In the last year Lesico wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to ₪659m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lesico?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lesico lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₪34m of cash and made a loss of ₪9.4m. With only ₪32.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Lesico (including 1 which doesn't sit too well with us) .

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.