Yahoo Finance Is Lena Gold-Mining Lenzoloto (MCX:LNZL) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Lena Gold-Mining Public Joint Stock Company Lenzoloto (MCX:LNZL) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Lena Gold-Mining Lenzoloto
How Much Debt Does Lena Gold-Mining Lenzoloto Carry?
As you can see below, Lena Gold-Mining Lenzoloto had ₽1.30b of debt at June 2019, down from ₽2.94b a year prior. But it also has ₽9.47b in cash to offset that, meaning it has ₽8.17b net cash.
A Look At Lena Gold-Mining Lenzoloto's Liabilities
According to the last reported balance sheet, Lena Gold-Mining Lenzoloto had liabilities of ₽3.43b due within 12 months, and liabilities of ₽1.85b due beyond 12 months. Offsetting this, it had ₽9.47b in cash and ₽1.03b in receivables that were due within 12 months. So it actually has ₽5.22b more liquid assets than total liabilities.
This excess liquidity is a great indication that Lena Gold-Mining Lenzoloto's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Lena Gold-Mining Lenzoloto boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Lena Gold-Mining Lenzoloto grew its EBIT by 352% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lena Gold-Mining Lenzoloto's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lena Gold-Mining Lenzoloto 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. In the last three years, Lena Gold-Mining Lenzoloto's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case Lena Gold-Mining Lenzoloto has ₽8.17b in net cash and a decent-looking balance sheet. And we liked the look of last year's 352% year-on-year EBIT growth. So we don't think Lena Gold-Mining Lenzoloto's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Lena Gold-Mining Lenzoloto, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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