Does Live Company Group (LON: LVCG) use debt in a risky way?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Live Company Group Plc (LON: LVCG) uses debt in its business. But does this debt concern shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for Live Company Group
What is the debt of Live Company Group?
You can click on the graph below for historical figures, but it shows that as of June 2021, Live Company Group was in debt of £ 1.88million, an increase from £ 1.74million sterling, over one year. However, given that it has a cash reserve of £ 91.0k, its net debt is less, at around £ 1.79m.
How healthy is Live Company Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Live Company Group had liabilities of £ 4.28million due within 12 months and liabilities of £ 2.20million beyond. In compensation for these obligations he had cash of £ 91.0k as well as receivables valued at £ 524.0k due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by £ 5.86 million.
This shortfall is sizable compared to its market capitalization of £ 6.25million, so he suggests shareholders keep an eye on Live Company Group’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face serious dilution. There is no doubt that we learn the most about debt from the balance sheet. But it is the Live Company Group profits that will influence the way the balance sheet looks in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Live Company Group has incurred a loss before interest and taxes and has actually cut revenue by 66%, to £ 1.5million. To be frank, that doesn’t bode well.
While Live Company Group’s declining revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less appealing. Indeed, he lost a very substantial amount of £ 4.4million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we think the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent £ 1.6million in cash in the past year. In short, it’s a really risky title. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 6 warning signs for Live Company Group (4 are a little worrisome!) That you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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