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.' 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 LivePerson, Inc. (NASDAQ:LPSN) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is LivePerson's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 LivePerson had US$173.8m of debt, an increase on none, over one year. However, it does have US$224.7m in cash offsetting this, leading to net cash of US$50.9m.
A Look At LivePerson's Liabilities
The latest balance sheet data shows that LivePerson had liabilities of US$129.3m due within a year, and liabilities of US$189.4m falling due after that. On the other hand, it had cash of US$224.7m and US$51.5m worth of receivables due within a year. So its liabilities total US$42.5m more than the combination of its cash and short-term receivables.
This state of affairs indicates that LivePerson's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.41b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, LivePerson also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 LivePerson'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.
Over 12 months, LivePerson reported revenue of US$267m, which is a gain of 14%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is LivePerson?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that LivePerson had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$56m and booked a US$56m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$225m. That means it could keep spending at its current rate for more than three years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting LivePerson insider transactions.
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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