Is Landec (NASDAQ:LNDC) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Landec Corporation (NASDAQ:LNDC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Landec

How Much Debt Does Landec Carry?

You can click the graphic below for the historical numbers, but it shows that as of February 2021 Landec had US$188.2m of debt, an increase on US$175.9m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Landec's Balance Sheet?

According to the last reported balance sheet, Landec had liabilities of US$125.3m due within 12 months, and liabilities of US$179.9m due beyond 12 months. On the other hand, it had cash of US$2.25m and US$69.6m worth of receivables due within a year. So it has liabilities totalling US$233.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$349.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Landec 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.

Over 12 months, Landec made a loss at the EBIT level, and saw its revenue drop to US$560m, which is a fall of 4.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, Landec had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$2.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$18m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Landec .

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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