Health Check: How Cautiously Does Lendlease Group (ASX: LLC) Use Debt?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that 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 Leasing group (ASX: LLC) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Lendlease Group
What is the debt of Lendlease Group?
The graph below, which you can click for more details, shows that Lendlease Group was in debt of A $ 2.36 billion in June 2021; about the same as the previous year. On the other hand, it has A $ 1.66 billion in cash, resulting in net debt of around A $ 695.0 million.
How healthy is Lendlease Group’s balance sheet?
We can see from the most recent balance sheet that Lendlease Group had AUS $ 5.98 billion in liabilities due within one year and AUS $ 4.07 billion in liabilities beyond. In compensation for these obligations, it had cash of A $ 1.66 billion as well as receivables valued at A $ 1.75 billion due within 12 months. Its liabilities therefore total A $ 6.64 billion more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of A $ 7.27 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Lendlease Group’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over the past year, Lendlease Group has incurred a loss before interest and taxes and has actually reduced revenues by 16% to A $ 9.9 billion. We would much prefer to see the growth.
Not only has Lendlease Group revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to AUD 18 million. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. On the positive side, we note that EBIT for the past twelve months is worse than free cash flow of A $ 347 million and profit of A $ 220 million. So one could argue that there is still a chance that he could put things on the right track. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 2 warning signs for Lendlease Group you must be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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