LightPath Technologies (NASDAQ:LPTH) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, LightPath Technologies, Inc. (NASDAQ:LPTH) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LightPath Technologies

What Is LightPath Technologies's Net Debt?

As you can see below, LightPath Technologies had US$5.31m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$5.31m, its net debt is less, at about US$2.8k.

How Strong Is LightPath Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LightPath Technologies had liabilities of US$8.13m due within 12 months and liabilities of US$5.41m due beyond that. Offsetting these obligations, it had cash of US$5.31m as well as receivables valued at US$6.84m due within 12 months. So it has liabilities totalling US$1.39m more than its cash and near-term receivables, combined.

Having regard to LightPath Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$77.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, LightPath Technologies has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that LightPath Technologies grew its EBIT by 4,948% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LightPath Technologies's ability to maintain a healthy balance sheet going forward. 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. So we always check how much of that EBIT is translated into free cash flow. In the last two years, LightPath Technologies's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that LightPath Technologies's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Zooming out, LightPath Technologies seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with LightPath Technologies .

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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