Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies LatAm Autos Limited (ASX:LAA) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for LatAm Autos
How Much Debt Does LatAm Autos Carry?
As you can see below, LatAm Autos had AU$7.38m of debt at June 2019, down from AU$9.79m a year prior. However, because it has a cash reserve of AU$5.21m, its net debt is less, at about AU$2.17m.
A Look At LatAm Autos's Liabilities
We can see from the most recent balance sheet that LatAm Autos had liabilities of AU$6.80m falling due within a year, and liabilities of AU$8.28m due beyond that. On the other hand, it had cash of AU$5.21m and AU$3.33m worth of receivables due within a year. So its liabilities total AU$6.55m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since LatAm Autos has a market capitalization of AU$29.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is LatAm Autos's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, LatAm Autos reported revenue of AU$7.8m, which is a gain of 23%. With any luck the company will be able to grow its way to profitability.