Yahoo Finance Is Lark Distilling (ASX:LRK) Using Debt Sensibly?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lark Distilling Co. Ltd (ASX:LRK) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Lark Distilling
How Much Debt Does Lark Distilling Carry?
As you can see below, at the end of June 2020, Lark Distilling had AU$5.00m of debt, up from AU$89.1k a year ago. Click the image for more detail. But on the other hand it also has AU$6.12m in cash, leading to a AU$1.12m net cash position.
A Look At Lark Distilling's Liabilities
According to the last reported balance sheet, Lark Distilling had liabilities of AU$3.63m due within 12 months, and liabilities of AU$5.29m due beyond 12 months. Offsetting this, it had AU$6.12m in cash and AU$1.49m in receivables that were due within 12 months. So it has liabilities totalling AU$1.3m more than its cash and near-term receivables, combined.
Of course, Lark Distilling has a market capitalization of AU$56.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lark Distilling also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lark Distilling will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Lark Distilling reported revenue of AU$7.4m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Lark Distilling?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lark Distilling had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$5.1m and booked a AU$1.3m accounting loss. With only AU$1.12m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Lark Distilling may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Lark Distilling is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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.
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