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. Importantly, L-Konzept Holding AG (FRA:LKB) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is L-Konzept Holding's Net Debt?
You can click the graphic below for the historical numbers, but it shows that L-Konzept Holding had €496.9k of debt in December 2018, down from €887.2k, one year before. On the flip side, it has €269.4k in cash leading to net debt of about €227.5k.
How Strong Is L-Konzept Holding's Balance Sheet?
We can see from the most recent balance sheet that L-Konzept Holding had liabilities of €334.9k falling due within a year, and liabilities of €4.59m due beyond that. Offsetting these obligations, it had cash of €269.4k as well as receivables valued at €1.92m due within 12 months. So its liabilities total €2.74m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of €2.86m, so it does suggest shareholders should keep an eye on L-Konzept Holding's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since L-Konzept Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Given it has no significant operating revenue at the moment, shareholders will be hoping L-Konzept Holding can make progress and gain better traction for the business, before it runs low on cash.
While L-Konzept Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €1.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 €355k of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like L-Konzept Holding I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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