Is Life360 (ASX:360) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Life360, Inc. (ASX:360) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that Life360 had debt of US$4.51m at the end of September 2023, a reduction from US$7.36m over a year. But on the other hand it also has US$61.8m in cash, leading to a US$57.3m net cash position.

A Look At Life360's Liabilities

Zooming in on the latest balance sheet data, we can see that Life360 had liabilities of US$72.7m due within 12 months and liabilities of US$3.41m due beyond that. Offsetting this, it had US$61.8m in cash and US$40.6m in receivables that were due within 12 months. So it actually has US$26.3m 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Life360 reported revenue of US$289m, which is a gain of 51%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Life360?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Life360 had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$4.9m of cash and made a loss of US$37m. But the saving grace is the US$57.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Life360 may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 1 warning sign with Life360 , and understanding them should be part of your investment process.

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.

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

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.