Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lumentum Holdings Inc. (NASDAQ:LITE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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, 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 Lumentum Holdings
What Is Lumentum Holdings's Net Debt?
As you can see below, at the end of September 2023, Lumentum Holdings had US$2.82b of debt, up from US$2.32b a year ago. Click the image for more detail. However, because it has a cash reserve of US$1.94b, its net debt is less, at about US$872.3m.
A Look At Lumentum Holdings' Liabilities
We can see from the most recent balance sheet that Lumentum Holdings had liabilities of US$593.7m falling due within a year, and liabilities of US$2.64b due beyond that. On the other hand, it had cash of US$1.94b and US$228.0m worth of receivables due within a year. So it has liabilities totalling US$1.06b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Lumentum Holdings is worth US$3.64b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Lumentum Holdings'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.
Over 12 months, Lumentum Holdings made a loss at the EBIT level, and saw its revenue drop to US$1.6b, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
Not only did Lumentum Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$96m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$9.7m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lumentum Holdings you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.