Health Check: How Prudently Does Lumito (NGM:LUMITO) Use 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.' 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. Importantly, Lumito AB (publ) (NGM:LUMITO) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Lumito

What Is Lumito's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Lumito had debt of kr20.0m, up from none in one year. However, it does have kr26.2m in cash offsetting this, leading to net cash of kr6.17m.

How Healthy Is Lumito's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lumito had liabilities of kr25.8m due within 12 months and liabilities of kr1.0k due beyond that. Offsetting these obligations, it had cash of kr26.2m as well as receivables valued at kr1.31m due within 12 months. So it actually has kr1.64m more liquid assets than total liabilities.

Having regard to Lumito's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr148.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Lumito has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lumito will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, Lumito shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is Lumito?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lumito had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr41m and booked a kr32m accounting loss. Given it only has net cash of kr6.17m, the company may need to raise more capital if it doesn't reach break-even 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Lumito (4 make us uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.