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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that LivePerson, Inc. (NASDAQ:LPSN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is LivePerson's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 LivePerson had debt of US$556.0m, up from US$184.4m in one year. But on the other hand it also has US$664.3m in cash, leading to a US$108.3m net cash position.
A Look At LivePerson's Liabilities
Zooming in on the latest balance sheet data, we can see that LivePerson had liabilities of US$216.1m due within 12 months and liabilities of US$566.0m due beyond that. Offsetting this, it had US$664.3m in cash and US$89.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$27.9m.
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 while it's hard to imagine that the US$4.11b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, LivePerson boasts net cash, so it's fair to say it does not have a heavy debt load! 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 LivePerson 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.
In the last year LivePerson wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$424m. With any luck the company will be able to grow its way to profitability.
So How Risky Is LivePerson?
Although LivePerson had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$10.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that LivePerson is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example LivePerson has 3 warning signs (and 1 which can't be ignored) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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