The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, emphasizes that the biggest investment risk is not the volatility of prices, but the potential for a permanent loss of capital. When assessing a company’s risk level, it is important to consider its use of debt, as excessive debt can lead to financial ruin. Liberty Latin America Ltd. (NASDAQ:LILA) is one such company that utilizes debt, prompting shareholders to question if this is cause for concern.
Debt becomes problematic for a company when it struggles to repay it, either through raising capital or using its own cash flow. If the company fails to meet its debt obligations, shareholders could be left with nothing. Alternatively, the company may need to issue new equity at a low price, diluting shareholder value. Debt can be beneficial for businesses requiring capital for growth, but it must be managed carefully.
In December 2023, Liberty Latin America had $8.21 billion in debt, similar to the previous year. However, with a cash reserve of $1.08 billion, its net debt was approximately $7.13 billion. The company also had liabilities of $2.13 billion due within 12 months and $9.15 billion due beyond that, outweighing its cash and short-term receivables.
Analyzing the company’s debt relative to its earnings, Liberty Latin America’s debt to EBITDA ratio suggests moderate debt usage, but its weak interest cover indicates high leverage. The company’s declining EBIT and limited free cash flow raise concerns about its ability to repay debt in the future.
In conclusion, Liberty Latin America’s high debt levels, coupled with its financial performance, raise red flags for shareholders. While the company’s ability to generate free cash flow is somewhat reassuring, its overall debt situation is worrisome. Investors are urged to monitor the company closely and consider the implications of its debt on long-term profitability.