We believe Livent (NYSE: LTHM) can stay on top of its 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 Livent Company (NYSE: LTHM) uses debt in its business. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot 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. 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. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for Livent

What is Livent’s net debt?

The image below, which you can click for more details, shows that as of September 2021, Livent was in debt of $ 240.1 million, up from $ 224.1 million in a year. However, it has US $ 195.3 million in cash offsetting this, which leads to net debt of around US $ 44.8 million.

NYSE: LTHM Debt to Equity History December 12, 2021

A look at Livent’s responsibilities

We can see from the most recent balance sheet that Livent had liabilities of US $ 88.7 million due within one year and liabilities of US $ 277.8 million due beyond. In compensation for these obligations, it had cash of US $ 195.3 million as well as receivables valued at US $ 113.2 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 58.0 million.

Considering Livent’s size, it appears that his liquid assets are well balanced with his total liabilities. So the $ 4.42 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. But in any case, Livent has virtually no net debt, so it’s fair to say that she doesn’t have a lot of debt!

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.

While Livent’s low debt-to-EBITDA ratio of 1.2 suggests modest use of debt, the fact that EBIT only covered interest expense 3.3 times last year gives us pause. We therefore recommend that you keep a close eye on the impact of financing costs on the business. Notably, Livent’s EBIT was higher than Elon Musk’s, gaining a whopping 510% from last year. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Livent’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Livent has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Based on what we’ve seen, Livent doesn’t find it easy, given its conversion from EBIT to free cash flow, but the other factors we’ve taken into account give us cause for optimism. There is no doubt that its ability to increase its EBIT is quite fast. When we consider all the elements mentioned above, it seems to us that Livent is managing its debt quite well. But beware: we believe debt levels are high enough to warrant continued monitoring. 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. For example, we discovered 1 warning sign for Livent which you should know before investing here.

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.

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 any stock 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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