Liberty Latin America (NASDAQ:LILA) Seems To Be Using A Lot Of Debt

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.' 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. We note that Liberty Latin America Ltd. (NASDAQ:LILA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Liberty Latin America in our free report.

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Liberty Latin America Carry?

As you can see below, Liberty Latin America had US$8.12b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$735.6m in cash, and so its net debt is US$7.39b.

How Healthy Is Liberty Latin America's Balance Sheet?

According to the last reported balance sheet, Liberty Latin America had liabilities of US$2.04b due within 12 months, and liabilities of US$9.13b due beyond 12 months. Offsetting these obligations, it had cash of US$735.6m as well as receivables valued at US$919.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.52b.

The deficiency here weighs heavily on the US$1.03b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Liberty Latin America would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Liberty Latin America

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Liberty Latin America's debt to EBITDA ratio (4.9) suggests that it uses some debt, its interest cover is very weak, at 0.84, suggesting high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Investors should also be troubled by the fact that Liberty Latin America saw its EBIT drop by 15% over the last twelve months. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Liberty Latin America can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Liberty Latin America's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Liberty Latin America's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its conversion of EBIT to free cash flow is not so bad. After considering the datapoints discussed, we think Liberty Latin America has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. Given our concerns about Liberty Latin America's debt levels, it seems only prudent to check if insiders have been ditching the stock.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.