U.S. Markets open in 7 hrs 46 mins
  • S&P Futures

    4,357.75
    +8.75 (+0.20%)
     
  • Dow Futures

    34,219.00
    +34.00 (+0.10%)
     
  • Nasdaq Futures

    14,229.75
    +89.00 (+0.63%)
     
  • Russell 2000 Futures

    2,001.40
    +0.10 (+0.00%)
     
  • Crude Oil

    85.40
    -0.20 (-0.23%)
     
  • Gold

    1,847.70
    -4.80 (-0.26%)
     
  • Silver

    23.76
    -0.14 (-0.57%)
     
  • EUR/USD

    1.1307
    +0.0001 (+0.0113%)
     
  • 10-Yr Bond

    1.7830
    0.0000 (0.00%)
     
  • Vix

    31.16
    +2.31 (+8.01%)
     
  • GBP/USD

    1.3507
    +0.0001 (+0.0108%)
     
  • USD/JPY

    113.9260
    +0.0600 (+0.0527%)
     
  • BTC-USD

    37,442.27
    +1,393.92 (+3.87%)
     
  • CMC Crypto 200

    849.87
    +39.27 (+4.84%)
     
  • FTSE 100

    7,371.46
    -122.67 (-1.64%)
     
  • Nikkei 225

    27,011.33
    -120.01 (-0.44%)
     

Is Life360 (ASX:360) Using Debt In A Risky Way?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • LIFX

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Life360, Inc. (ASX:360) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Life360

What Is Life360's Net Debt?

As you can see below, at the end of June 2021, Life360 had US$2.11m of debt, up from none a year ago. Click the image for more detail. But it also has US$50.6m in cash to offset that, meaning it has US$48.4m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Life360's Liabilities

According to the last reported balance sheet, Life360 had liabilities of US$21.1m due within 12 months, and liabilities of US$1.51m due beyond 12 months. On the other hand, it had cash of US$50.6m and US$12.0m worth of receivables due within a year. So it can boast US$40.0m more liquid assets than total liabilities.

This surplus suggests that Life360 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Life360 has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Life360 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.

Over 12 months, Life360 reported revenue of US$91m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Life360?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Life360 had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$6.8m and booked a US$20m accounting loss. But at least it has US$48.4m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Life360 may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Life360 , 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.