Here's Why Luna Innovations (NASDAQ:LUNA) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Luna Innovations Incorporated (NASDAQ:LUNA) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Luna Innovations

What Is Luna Innovations's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Luna Innovations had debt of US$25.2m, up from US$22.3m in one year. On the flip side, it has US$3.56m in cash leading to net debt of about US$21.7m.

A Look At Luna Innovations' Liabilities

Zooming in on the latest balance sheet data, we can see that Luna Innovations had liabilities of US$32.7m due within 12 months and liabilities of US$25.4m due beyond that. Offsetting this, it had US$3.56m in cash and US$40.9m in receivables that were due within 12 months. So its liabilities total US$13.6m more than the combination of its cash and short-term receivables.

Since publicly traded Luna Innovations shares are worth a total of US$298.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Luna Innovations'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 Luna Innovations wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$112m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Luna Innovations's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$550k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$13m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Luna Innovations (including 1 which is significant) .

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.