Yahoo Finance Lumentum Holdings (NASDAQ:LITE) Seems To Use Debt Quite Sensibly
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Lumentum Holdings Inc. (NASDAQ:LITE) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Lumentum Holdings
What Is Lumentum Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of July 2022 Lumentum Holdings had US$1.88b of debt, an increase on US$1.18b, over one year. But it also has US$2.55b in cash to offset that, meaning it has US$673.0m net cash.
A Look At Lumentum Holdings' Liabilities
According to the last reported balance sheet, Lumentum Holdings had liabilities of US$716.5m due within 12 months, and liabilities of US$1.57b due beyond 12 months. Offsetting these obligations, it had cash of US$2.55b as well as receivables valued at US$265.9m due within 12 months. So it actually has US$527.7m more liquid assets than total liabilities.
This surplus suggests that Lumentum Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Lumentum Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Unfortunately, Lumentum Holdings saw its EBIT slide 6.6% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lumentum Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lumentum Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Lumentum Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Lumentum Holdings has US$673.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 163% of that EBIT to free cash flow, bringing in US$368m. So we are not troubled with Lumentum Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Lumentum Holdings you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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