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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Lanakam S.A. (ATH:LANAC) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Lanakam
What Is Lanakam's Net Debt?
As you can see below, Lanakam had €1.00m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of €902.1k, its net debt is less, at about €102.8k.
A Look At Lanakam's Liabilities
We can see from the most recent balance sheet that Lanakam had liabilities of €1.98m falling due within a year, and liabilities of €80.6k due beyond that. Offsetting these obligations, it had cash of €902.1k as well as receivables valued at €373.6k due within 12 months. So its liabilities total €782.9k more than the combination of its cash and short-term receivables.
Since publicly traded Lanakam shares are worth a total of €6.12m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lanakam will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Lanakam saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months Lanakam produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €465k. 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. Another cause for caution is that is bled €500k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Lanakam's profit, revenue, and operating cashflow have changed over the last few years.