Does Lokum Deweloper (WSE:LKD) Have A Healthy Balance Sheet?

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, Lokum Deweloper S.A. (WSE:LKD) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Lokum Deweloper

How Much Debt Does Lokum Deweloper Carry?

As you can see below, Lokum Deweloper had zł54.0m of debt at March 2024, down from zł198.6m a year prior. But on the other hand it also has zł153.5m in cash, leading to a zł99.5m net cash position.

How Strong Is Lokum Deweloper's Balance Sheet?

We can see from the most recent balance sheet that Lokum Deweloper had liabilities of zł53.1m falling due within a year, and liabilities of zł115.6m due beyond that. On the other hand, it had cash of zł153.5m and zł23.5m worth of receivables due within a year. So it actually has zł8.26m more liquid assets than total liabilities.

This short term liquidity is a sign that Lokum Deweloper could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lokum Deweloper 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 Lokum Deweloper has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lokum Deweloper 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, a company can only pay off debt with cold hard cash, not accounting profits. While Lokum Deweloper has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Lokum Deweloper actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lokum Deweloper has net cash of zł99.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of zł317m, being 111% of its EBIT. So is Lokum Deweloper's debt a risk? It doesn't seem so to us. 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 be aware of the 3 warning signs we've spotted with Lokum Deweloper .

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.