Health Check: How Prudently Does Lantronix (NASDAQ:LTRX) Use 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.' 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. We note that Lantronix, Inc. (NASDAQ:LTRX) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lantronix

What Is Lantronix's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Lantronix had US$28.0m of debt, an increase on US$4.42m, over one year. But on the other hand it also has US$36.4m in cash, leading to a US$8.38m net cash position.

How Healthy Is Lantronix's Balance Sheet?

We can see from the most recent balance sheet that Lantronix had liabilities of US$30.2m falling due within a year, and liabilities of US$27.8m due beyond that. Offsetting this, it had US$36.4m in cash and US$25.6m in receivables that were due within 12 months. So it can boast US$4.01m more liquid assets than total liabilities.

This short term liquidity is a sign that Lantronix could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lantronix boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Lantronix'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.

In the last year Lantronix wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to US$99m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Lantronix?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Lantronix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$3.3m and booked a US$7.0m accounting loss. But at least it has US$8.38m on the balance sheet to spend on growth, near-term. Lantronix's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Lantronix is showing 3 warning signs in our investment analysis , you should know about...

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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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.