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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Louisiana-Pacific Corporation (NYSE:LPX) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Louisiana-Pacific's Net Debt?
As you can see below, Louisiana-Pacific had US$346.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$624.0m in cash, leading to a US$278.0m net cash position.
How Healthy Is Louisiana-Pacific's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Louisiana-Pacific had liabilities of US$459.0m due within 12 months and liabilities of US$595.0m due beyond that. Offsetting these obligations, it had cash of US$624.0m as well as receivables valued at US$320.0m due within 12 months. So its liabilities total US$110.0m more than the combination of its cash and short-term receivables.
Of course, Louisiana-Pacific has a market capitalization of US$4.45b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Louisiana-Pacific also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Louisiana-Pacific grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Louisiana-Pacific 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Louisiana-Pacific may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Louisiana-Pacific recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Louisiana-Pacific has US$278.0m in net cash. And it impressed us with its EBIT growth of 91% over the last year. So we don't think Louisiana-Pacific's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Louisiana-Pacific (of which 2 are a bit concerning!) 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.
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