Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lantronix, Inc. (NASDAQ:LTRX) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Lantronix Carry?

The image below, which you can click on for greater detail, shows that Lantronix had debt of US$4.05m at the end of March 2021, a reduction from US$5.52m over a year. But on the other hand it also has US$8.28m in cash, leading to a US$4.23m net cash position.

How Strong Is Lantronix’s Balance Sheet?

The latest balance sheet data shows that Lantronix had liabilities of US$18.7m due within a year, and liabilities of US$3.64m falling due after that. Offsetting this, it had US$8.28m in cash and US$12.9m in receivables that were due within 12 months. So it has liabilities totalling US$1.20m more than its cash and near-term receivables, combined.

Having regard to Lantronix’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$141.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Lantronix also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lantronix’s ability to maintain a healthy balance sheet going forward.

Over 12 months, Lantronix reported revenue of US$68m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Lantronix?

Although Lantronix had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.7m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Lantronix shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn’t change our opinion that the stock is risky.