Lokum Deweloper (WSE:LKD) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Lokum Deweloper S.A. (WSE:LKD) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lokum Deweloper

What Is Lokum Deweloper's Net Debt?

The image below, which you can click on for greater detail, shows that Lokum Deweloper had debt of zł54.1m at the end of September 2024, a reduction from zł154.8m over a year. But on the other hand it also has zł98.0m in cash, leading to a zł43.9m net cash position.

A Look At Lokum Deweloper's Liabilities

We can see from the most recent balance sheet that Lokum Deweloper had liabilities of zł57.2m falling due within a year, and liabilities of zł105.8m due beyond that. On the other hand, it had cash of zł98.0m and zł10.6m worth of receivables due within a year. So it has liabilities totalling zł54.3m more than its cash and near-term receivables, combined.

Since publicly traded Lokum Deweloper shares are worth a total of zł410.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lokum Deweloper also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Lokum Deweloper saw its EBIT drop by 2.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lokum Deweloper can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Lokum Deweloper actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Lokum Deweloper does have more liabilities than liquid assets, it also has net cash of zł43.9m. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in zł192m. So we don't think Lokum Deweloper's use of debt is risky. 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 Lokum Deweloper (including 1 which 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.