David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Limoneira Company (NASDAQ:LMNR) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Limoneira Carry?

As you can see below, Limoneira had US$40.6m of debt, at July 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$1.09m, its net debt is less, at about US$39.6m.

How Strong Is Limoneira's Balance Sheet?

The latest balance sheet data shows that Limoneira had liabilities of US$38.2m due within a year, and liabilities of US$63.4m falling due after that. On the other hand, it had cash of US$1.09m and US$25.7m worth of receivables due within a year. So its liabilities total US$74.8m more than the combination of its cash and short-term receivables.

Given Limoneira has a market capitalization of US$491.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Limoneira's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Limoneira wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to US$189m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Limoneira had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$13m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$82k of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Limoneira you should be aware of, and 1 of them can't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.