Lumito (NGM:LUMITO) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Lumito AB (publ) (NGM:LUMITO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lumito

How Much Debt Does Lumito Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Lumito had kr20.0m of debt, an increase on none, over one year. However, it does have kr32.3m in cash offsetting this, leading to net cash of kr12.3m.

How Healthy Is Lumito's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lumito had liabilities of kr26.6m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of kr32.3m and kr1.47m worth of receivables due within a year. So it actually has kr7.24m more liquid assets than total liabilities.

This surplus suggests that Lumito has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lumito boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Lumito doesn't have significant operating revenue, shareholders must hope it'll ramp sales of its new medical tech as soon as possible.

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. Indeed, in that time it burnt through kr42m of cash and made a loss of kr26m. Given it only has net cash of kr12.3m, 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Lumito (3 make us uncomfortable) you should be aware of.

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.