Would LivaNova (NASDAQ:LIVN) Be Better Off With Less 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.' 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. We can see that LivaNova PLC (NASDAQ:LIVN) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LivaNova

What Is LivaNova's Debt?

As you can see below, at the end of September 2020, LivaNova had US$651.2m of debt, up from US$342.2m a year ago. Click the image for more detail. However, it also had US$227.8m in cash, and so its net debt is US$423.4m.

How Strong Is LivaNova's Balance Sheet?

The latest balance sheet data shows that LivaNova had liabilities of US$281.8m due within a year, and liabilities of US$889.2m falling due after that. Offsetting this, it had US$227.8m in cash and US$194.7m in receivables that were due within 12 months. So it has liabilities totalling US$748.5m more than its cash and near-term receivables, combined.

LivaNova has a market capitalization of US$3.21b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LivaNova's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, LivaNova made a loss at the EBIT level, and saw its revenue drop to US$952m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While LivaNova's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$33m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$150m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 LivaNova .

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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