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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Lightspeed Commerce Inc. (TSE:LSPD) 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Lightspeed Commerce Carry?
The chart below, which you can click on for greater detail, shows that Lightspeed Commerce had US$29.8m in debt in March 2022; about the same as the year before. But on the other hand it also has US$953.7m in cash, leading to a US$923.8m net cash position.
How Strong Is Lightspeed Commerce's Balance Sheet?
We can see from the most recent balance sheet that Lightspeed Commerce had liabilities of US$157.9m falling due within a year, and liabilities of US$62.8m due beyond that. Offsetting these obligations, it had cash of US$953.7m as well as receivables valued at US$39.5m due within 12 months. So it actually has US$772.4m more liquid assets than total liabilities.
This surplus suggests that Lightspeed Commerce is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Lightspeed Commerce has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lightspeed Commerce's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Lightspeed Commerce wasn't profitable at an EBIT level, but managed to grow its revenue by 147%, to US$548m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Lightspeed Commerce?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lightspeed Commerce had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$98m of cash and made a loss of US$288m. While this does make the company a bit risky, it's important to remember it has net cash of US$923.8m. That means it could keep spending at its current rate for more than two years. Importantly, Lightspeed Commerce's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 3 warning signs with Lightspeed Commerce , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.