Is Lulu's Fashion Lounge Holdings (NASDAQ:LVLU) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Lulu's Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Lulu's Fashion Lounge Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Lulu's Fashion Lounge Holdings had debt of US$13.1m, up from US$8.00m in one year. On the flip side, it has US$4.46m in cash leading to net debt of about US$8.63m.

How Healthy Is Lulu's Fashion Lounge Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lulu's Fashion Lounge Holdings had liabilities of US$74.3m due within 12 months and liabilities of US$20.5m due beyond that. On the other hand, it had cash of US$4.46m and US$6.34m worth of receivables due within a year. So it has liabilities totalling US$84.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$16.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Lulu's Fashion Lounge Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lulu's Fashion Lounge Holdings'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.

See our latest analysis for Lulu's Fashion Lounge Holdings

In the last year Lulu's Fashion Lounge Holdings had a loss before interest and tax, and actually shrunk its revenue by 11%, to US$316m. We would much prefer see growth.

Caveat Emptor

While Lulu's Fashion Lounge Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$24m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$273k in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lulu's Fashion Lounge Holdings is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.