Is Lindsay (NYSE:LNN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Lindsay Corporation (NYSE:LNN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lindsay

What Is Lindsay's Debt?

The chart below, which you can click on for greater detail, shows that Lindsay had US$115.4m in debt in May 2023; about the same as the year before. However, its balance sheet shows it holds US$144.4m in cash, so it actually has US$28.9m net cash.

How Strong Is Lindsay's Balance Sheet?

According to the last reported balance sheet, Lindsay had liabilities of US$133.0m due within 12 months, and liabilities of US$153.8m due beyond 12 months. On the other hand, it had cash of US$144.4m and US$155.5m worth of receivables due within a year. So it actually has US$13.0m more liquid assets than total liabilities.

Having regard to Lindsay's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.34b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Lindsay 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 Lindsay has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lindsay'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lindsay 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. Looking at the most recent three years, Lindsay recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lindsay has net cash of US$28.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 40% year-on-year EBIT growth. So is Lindsay's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Lindsay, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.