We think Lenovo Group (HKG:992) can stay on top of its debt
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Lenovo Group Limited (HKG:992) is in debt. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Lenovo Group
What is Lenovo Group’s debt?
As you can see below, Lenovo Group had $3.75 billion in debt as of December 2021, up from $4.57 billion the previous year. But he also has $4.00 billion in cash to offset that, which means he has $254.1 million in net cash.
How healthy is Lenovo Group’s balance sheet?
According to the latest published balance sheet, Lenovo Group had liabilities of $33.7 billion due within 12 months and liabilities of $7.15 billion due beyond 12 months. On the other hand, it had $4.00 billion in cash and $16.8 billion in receivables within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by $20.1 billion.
This deficit casts a shadow over the $11.9 billion company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Lenovo Group would likely need a major recapitalization if its creditors were to demand repayment. Since Lenovo Group has more cash than debt, we’re pretty confident that it can manage its debt, despite having a lot of debt in total.
On top of that, we are pleased to report that Lenovo Group increased its EBIT by 77%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Lenovo Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. Lenovo Group may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Over the past three years, Lenovo Group has had free cash flow of 78% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
Although Lenovo Group’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $254.1 million. And it has impressed us with its 77% EBIT growth over the past year. We are therefore not concerned about the use of Lenovo Group debt. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew Lenovo Group insiders bought stock: if you’re on the same page, you can find out if insiders are buying by clicking this link. link.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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