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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Lightspeed POS Inc. (TSE:LSPD) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. 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.
What Is Lightspeed POS's Debt?
As you can see below, at the end of September 2020, Lightspeed POS had US$29.7m of debt, up from none a year ago. Click the image for more detail. However, it does have US$513.1m in cash offsetting this, leading to net cash of US$483.4m.
How Strong Is Lightspeed POS' Balance Sheet?
According to the last reported balance sheet, Lightspeed POS had liabilities of US$74.5m due within 12 months, and liabilities of US$55.4m due beyond 12 months. Offsetting these obligations, it had cash of US$513.1m as well as receivables valued at US$10.2m due within 12 months. So it can boast US$393.4m more liquid assets than total liabilities.
This surplus suggests that Lightspeed POS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lightspeed POS boasts net cash, so it's fair to say it does not have a heavy debt load! 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 POS'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.
In the last year Lightspeed POS wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$150m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Lightspeed POS?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Lightspeed POS 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$38m and booked a US$74m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$483.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Lightspeed POS's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often 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. Case in point: We've spotted 5 warning signs for Lightspeed POS you should be aware of, and 1 of them can't be ignored.
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. 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.
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