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 lastminute.com N.V. (VTX:LMN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

View our latest analysis for lastminute.com

What Is lastminute.com's Debt?

As you can see below, lastminute.com had €29.9m of debt at June 2019, down from €35.9m a year prior. But it also has €119.5m in cash to offset that, meaning it has €89.6m net cash.

How Strong Is lastminute.com's Balance Sheet?

The latest balance sheet data shows that lastminute.com had liabilities of €269.2m due within a year, and liabilities of €57.2m falling due after that. On the other hand, it had cash of €119.5m and €89.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €117.1m.

lastminute.com has a market capitalization of €332.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, lastminute.com boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, lastminute.com turned things around in the last 12 months, delivering and EBIT of €32m. 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 lastminute.com's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. lastminute.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, lastminute.com actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While lastminute.com does have more liabilities than liquid assets, it also has net cash of €90m. And it impressed us with free cash flow of €41m, being 129% of its EBIT. So we don't have any problem with lastminute.com's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in lastminute.com, you may well want to click here to check an interactive graph of its earnings per share history.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.