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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.' 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 Luna Innovations Incorporated (NASDAQ:LUNA) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.
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What Is Luna Innovations's Debt?
You can click the graphic below for the historical numbers, but it shows that Luna Innovations had US$15.8m of debt in December 2021, down from US$20.0m, one year before. But on the other hand it also has US$17.1m in cash, leading to a US$1.29m net cash position.
A Look At Luna Innovations' Liabilities
According to the last reported balance sheet, Luna Innovations had liabilities of US$32.7m due within 12 months, and liabilities of US$15.6m due beyond 12 months. Offsetting these obligations, it had cash of US$17.1m as well as receivables valued at US$26.1m due within 12 months. So it has liabilities totalling US$5.11m more than its cash and near-term receivables, combined.
Given Luna Innovations has a market capitalization of US$240.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Luna Innovations boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Luna Innovations's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.