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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Lindsay Corporation (NYSE:LNN) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Lindsay
How Much Debt Does Lindsay Carry?
As you can see below, Lindsay had US$115.9m of debt, at November 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$146.4m in cash, so it actually has US$30.6m net cash.
How Strong Is Lindsay’s Balance Sheet?
According to the last reported balance sheet, Lindsay had liabilities of US$102.4m due within 12 months, and liabilities of US$168.9m due beyond 12 months. On the other hand, it had cash of US$146.4m and US$76.1m worth of receivables due within a year. So it has liabilities totalling US$48.8m more than its cash and near-term receivables, combined.
Since publicly traded Lindsay shares are worth a total of US$1.63b, it seems unlikely that this level of liabilities would be a major 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, Lindsay boasts net cash, so it’s fair to say it does not have a heavy debt load!
Even more impressive was the fact that Lindsay grew its EBIT by 200% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lindsay’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 company can only pay off debt with cold hard cash, not accounting profits. Lindsay 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. Looking at the most recent three years, Lindsay recorded free cash flow of 45% of its EBIT, which is weaker than we’d expect. That’s not great, when it comes to paying down debt.
We could understand if investors are concerned about Lindsay’s liabilities, but we can be reassured by the fact it has has net cash of US$30.6m. And it impressed us with its EBIT growth of 200% over the last year. So is Lindsay’s debt a risk? It doesn’t seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we’ve spotted with Lindsay .
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.
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