We Think Lloyds Metals and Energy (NSE:LLOYDSME) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Lloyds Metals and Energy Limited (NSE:LLOYDSME) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lloyds Metals and Energy

What Is Lloyds Metals and Energy's Debt?

As you can see below, Lloyds Metals and Energy had ₹188.2m of debt at September 2023, down from ₹507.4m a year prior. But on the other hand it also has ₹4.56b in cash, leading to a ₹4.37b net cash position.

A Look At Lloyds Metals and Energy's Liabilities

The latest balance sheet data shows that Lloyds Metals and Energy had liabilities of ₹6.47b due within a year, and liabilities of ₹1.02b falling due after that. On the other hand, it had cash of ₹4.56b and ₹1.82b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.10b.

Having regard to Lloyds Metals and Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹285.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Lloyds Metals and Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Lloyds Metals and Energy has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Lloyds Metals and Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lloyds Metals and Energy 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. Over the last three years, Lloyds Metals and Energy saw substantial negative free cash flow, in total. 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 look at a company's total liabilities, it is very reassuring that Lloyds Metals and Energy has ₹4.37b in net cash. And we liked the look of last year's 80% year-on-year EBIT growth. So we are not troubled with Lloyds Metals and Energy's debt use. 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. For example, we've discovered 1 warning sign for Lloyds Metals and Energy that you should be aware of before investing here.

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.