Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, LMP Automotive Holdings, Inc. (NASDAQ:LMPX) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LMP Automotive Holdings

How Much Debt Does LMP Automotive Holdings Carry?

As you can see below, at the end of March 2020, LMP Automotive Holdings had US$5.94m of debt, up from US$2.32m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$18.0m in cash, so it actually has US$12.1m net cash.

How Healthy Is LMP Automotive Holdings's Balance Sheet?

The latest balance sheet data shows that LMP Automotive Holdings had liabilities of US$6.54m due within a year, and liabilities of US$1.39m falling due after that. Offsetting these obligations, it had cash of US$18.0m as well as receivables valued at US$4.59m due within 12 months. So it actually has US$14.7m more liquid assets than total liabilities.

This excess liquidity suggests that LMP Automotive Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, LMP Automotive Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine LMP Automotive Holdings'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.