We Think LMP Automotive Holdings (NASDAQ:LMPX) Has A Fair Chunk Of 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. As with many other companies LMP Automotive Holdings, Inc. (NASDAQ:LMPX) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for LMP Automotive Holdings

What Is LMP Automotive Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that LMP Automotive Holdings had debt of US$3.57m at the end of September 2020, a reduction from US$5.54m over a year. However, it does have US$3.33m in cash offsetting this, leading to net debt of about US$242.0k.

A Look At LMP Automotive Holdings' Liabilities

We can see from the most recent balance sheet that LMP Automotive Holdings had liabilities of US$2.00m falling due within a year, and liabilities of US$2.91m due beyond that. Offsetting these obligations, it had cash of US$3.33m as well as receivables valued at US$13.8m due within 12 months. So it actually has US$12.2m more liquid assets than total liabilities.

This surplus suggests that LMP Automotive Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, LMP Automotive Holdings has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LMP Automotive Holdings 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.

Over 12 months, LMP Automotive Holdings reported revenue of US$29m, which is a gain of 117%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, LMP Automotive Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$1.5m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. So it's risky, but with some potential. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - LMP Automotive Holdings has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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