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. We note that Livent Corporation (NYSE:LTHM) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Livent
How Much Debt Does Livent Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Livent had US$254.7m of debt, an increase on US$239.7m, over one year. However, it does have US$49.0m in cash offsetting this, leading to net debt of about US$205.7m.
NYSE:LTHM Debt to Equity History September 27th 2022
How Strong Is Livent's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Livent had liabilities of US$148.8m due within 12 months and liabilities of US$292.5m due beyond that. Offsetting these obligations, it had cash of US$49.0m as well as receivables valued at US$164.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$227.7m.
Of course, Livent has a market capitalization of US$5.41b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Livent's net debt is only 1.1 times its EBITDA. And its EBIT covers its interest expense a whopping 1k times over. So we're pretty relaxed about its super-conservative use of debt. Although Livent made a loss at the EBIT level, last year, it was also good to see that it generated US$165m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Livent can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Livent saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Our View
Based on what we've seen Livent is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. Looking at all this data makes us feel a little cautious about Livent's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Livent (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
伯克希尔哈撒韦的外部基金经理理想汽车·卢直言不讳地说,最大的投资风险不是价格的波动,而是你是否会遭受永久性的资本损失。因此,当你考虑到任何一只股票的风险有多大时,你需要考虑债务可能是显而易见的,因为太多的债务可能会让一家公司倒闭。我们注意到利文特公司(纽约证券交易所股票代码:LTHM)的资产负债表上确实有债务。但这笔债务对股东来说是一个担忧吗?
债务在什么时候是危险的?
债务是帮助企业发展的一种工具,但如果一家企业无法偿还贷款人的债务,那么它就只能听从贷款人的摆布。如果情况真的变得很糟糕,贷款人可以控制业务。尽管这并不常见,但我们确实经常看到负债累累的公司永久性地稀释股东的权益,因为贷款人迫使他们以令人沮丧的价格筹集资金。话虽如此,最常见的情况是一家公司对债务管理得相当好--并对自己有利。当我们检查债务水平时,我们首先同时考虑现金和债务水平。
查看我们对利文特的最新分析
利文特背负着多少债务?
你可以点击下图查看历史数据,但它显示,截至2022年6月,利文特的债务为2.547亿美元,比一年前增加了2.397亿美元。然而,它确实有4900万美元的现金来抵消这一点,导致净债务约为2.057亿美元。
纽约证券交易所:LTHM债转股历史2022年9月27日
利文特的资产负债表有多强劲?
放大最新的资产负债表数据,我们可以看到,利文特有1.488亿美元的债务在12个月内到期,还有2.925亿美元的债务在这之后到期。为了抵消这些债务,它有4900万美元的现金以及价值1.646亿美元的应收账款在12个月内到期。因此,它的负债比现金和(近期)应收账款之和高出2.277亿美元。
当然,利文特的市值为54.1亿美元,因此这些债务可能是可控的。但有足够的负债,我们肯定会建议股东继续监控未来的资产负债表。
我们通过查看公司的净债务除以利息、税项、折旧和摊销前收益(EBITDA),并计算其息税前收益(EBIT)覆盖利息支出(利息覆盖)的容易程度,来衡量公司的债务负担与其盈利能力的关系。这种方法的优点是,我们既考虑了债务的绝对数量(净债务与EBITDA之比),也考虑了与债务相关的实际利息支出(及其利息覆盖率)。
利文特的净债务仅为其EBITDA的1.1倍。它的息税前利润比利息支出高出1000倍。因此,我们对它对债务的超级保守使用相当放松。尽管利文特去年在息税前利润水平上出现了亏损,但它在过去12个月中创造了1.65亿美元的息税前利润,这也是一件好事。在分析债务水平时,资产负债表显然是一个起点。但最终,该业务未来的盈利能力将决定利文特能否随着时间的推移加强其资产负债表。所以,如果你关注未来,你可以看看这个免费显示分析师利润预测的报告。
最后,尽管税务人员可能喜欢会计利润,但贷款人只接受冷硬现金。因此,重要的是要检查其息税前收益(EBIT)中有多少转换为实际的自由现金流。在过去的一年里,利文特的自由现金流总额为大幅负值。尽管投资者无疑预计这种情况会在适当的时候逆转,但这显然意味着它使用债务的风险更大。
我们的观点
根据我们所看到的,利文特发现这并不容易,因为它将息税前利润转换为自由现金流,但我们考虑的其他因素让我们有理由乐观。特别是,它的利息封面让我们眼花缭乱。看着所有这些数据,我们对利文特的债务水平感到有点谨慎。虽然我们认识到债务可以提高股本回报率,但我们建议股东密切关注其债务水平,以免增加。毫无疑问,我们从资产负债表中了解到的债务最多。但归根结底,每家公司都可能包含存在于资产负债表之外的风险。我们已经确定了两个警告信号对于利文特(至少有1个不应该被忽视),了解他们应该是你投资过程的一部分。
如果你有兴趣投资于可以在没有债务负担的情况下增长利润的企业,那么看看这个免费资产负债表上有净现金的成长型企业名单。
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本文由Simply Wall St.撰写,具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论,我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议,也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意,我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。