Is Life360 (ASX:360) Using Debt Sensibly?

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. As with many other companies Life360, Inc. (ASX:360) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Life360

How Much Debt Does Life360 Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Life360 had US$11.1m of debt, an increase on US$3.07m, over one year. But on the other hand it also has US$82.7m in cash, leading to a US$71.6m net cash position.

How Strong Is Life360's Balance Sheet?

We can see from the most recent balance sheet that Life360 had liabilities of US$90.6m falling due within a year, and liabilities of US$13.5m due beyond that. On the other hand, it had cash of US$82.7m and US$25.2m worth of receivables due within a year. So it actually has US$3.84m more liquid assets than total liabilities.

Having regard to Life360's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$666.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Life360 boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Life360's ability to maintain a healthy balance sheet going forward. 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$141m, which is a gain of 66%, 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?

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. Indeed, in that time it burnt through US$31m of cash and made a loss of US$55m. However, it has net cash of US$71.6m, so it has a bit of time before it will need more capital. 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. 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. For example, we've discovered 3 warning signs for Life360 that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.