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.' 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. As with many other companies Lifecore Biomedical, Inc. (NASDAQ:LFCR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Lifecore Biomedical Carry?

You can click the graphic below for the historical numbers, but it shows that Lifecore Biomedical had US$119.8m of debt in November 2024, down from US$153.7m, one year before. On the flip side, it has US$9.46m in cash leading to net debt of about US$110.3m.

A Look At Lifecore Biomedical's Liabilities

According to the last reported balance sheet, Lifecore Biomedical had liabilities of US$35.3m due within 12 months, and liabilities of US$160.3m due beyond 12 months. Offsetting this, it had US$9.46m in cash and US$30.3m in receivables that were due within 12 months. So its liabilities total US$155.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$254.4m, so it does suggest shareholders should keep an eye on Lifecore Biomedical's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lifecore Biomedical 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.

In the last year Lifecore Biomedical wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$131m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Lifecore Biomedical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$9.9m. 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. Another cause for caution is that is bled US$14m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 4 warning signs with Lifecore Biomedical (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.