Lindsay (NYSE:LNN) Seems To Use Debt Quite Sensibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Lindsay Corporation (NYSE:LNN) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lindsay

What Is Lindsay's Net Debt?

As you can see below, Lindsay had US$115.2m of debt, at November 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$194.1m in cash to offset that, meaning it has US$78.9m net cash.

How Healthy Is Lindsay's Balance Sheet?

The latest balance sheet data shows that Lindsay had liabilities of US$129.8m due within a year, and liabilities of US$152.7m falling due after that. Offsetting this, it had US$194.1m in cash and US$124.0m in receivables that were due within 12 months. So it actually has US$35.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Lindsay could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lindsay boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Lindsay's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lindsay can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Lindsay 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. During the last three years, Lindsay produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lindsay has net cash of US$78.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$64m, being 70% of its EBIT. So we are not troubled with Lindsay's debt use. 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 1 warning sign for Lindsay that 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.