Lantronix (NASDAQ:LTRX) Has Debt But No Earnings; Should You Worry?

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 note that Lantronix, Inc. (NASDAQ:LTRX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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.

View our latest analysis for Lantronix

What Is Lantronix's Debt?

As you can see below, Lantronix had US$17.0m of debt at March 2024, down from US$19.5m a year prior. However, its balance sheet shows it holds US$24.6m in cash, so it actually has US$7.67m net cash.

How Strong Is Lantronix's Balance Sheet?

The latest balance sheet data shows that Lantronix had liabilities of US$43.6m due within a year, and liabilities of US$25.7m falling due after that. Offsetting these obligations, it had cash of US$24.6m as well as receivables valued at US$30.1m due within 12 months. So its liabilities total US$14.6m more than the combination of its cash and short-term receivables.

Of course, Lantronix has a market capitalization of US$140.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, 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 11%, to US$146m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Lantronix?

While Lantronix lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$20m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For instance, we've identified 2 warning signs for Lantronix that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.