Is Lloyds Engineering Works (NSE:LLOYDSENGG) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Lloyds Engineering Works Limited (NSE:LLOYDSENGG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

View our latest analysis for Lloyds Engineering Works

What Is Lloyds Engineering Works's Debt?

As you can see below, at the end of March 2024, Lloyds Engineering Works had ₹608.1m of debt, up from ₹464.0m a year ago. Click the image for more detail. However, it does have ₹1.25b in cash offsetting this, leading to net cash of ₹644.1m.

How Healthy Is Lloyds Engineering Works' Balance Sheet?

We can see from the most recent balance sheet that Lloyds Engineering Works had liabilities of ₹1.40b falling due within a year, and liabilities of ₹205.1m due beyond that. Offsetting these obligations, it had cash of ₹1.25b as well as receivables valued at ₹1.71b due within 12 months. So it actually has ₹1.36b more liquid assets than total liabilities.

This state of affairs indicates that Lloyds Engineering Works' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹77.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Lloyds Engineering Works boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Lloyds Engineering Works grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. 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 Lloyds Engineering Works 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lloyds Engineering Works may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lloyds Engineering Works burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lloyds Engineering Works has ₹644.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 94% year-on-year EBIT growth. So we don't have any problem with Lloyds Engineering Works's use of debt. 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 Lloyds Engineering Works is showing 3 warning signs in our investment analysis , and 1 of those is significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com