Is Life360 (ASX:360) Using Debt Sensibly?

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 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. Importantly, Life360, Inc. (ASX:360) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Life360

What Is Life360's Debt?

You can click the graphic below for the historical numbers, but it shows that Life360 had US$7.68m of debt in March 2023, down from US$11.1m, one year before. However, its balance sheet shows it holds US$61.4m in cash, so it actually has US$53.7m net cash.

A Look At Life360's Liabilities

The latest balance sheet data shows that Life360 had liabilities of US$80.6m due within a year, and liabilities of US$5.70m falling due after that. Offsetting this, it had US$61.4m in cash and US$31.8m in receivables that were due within 12 months. So it actually has US$6.89m more liquid assets than total liabilities.

This state of affairs indicates that Life360's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.01b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Life360 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 it is future earnings, more than anything, that will determine Life360'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.

Over 12 months, Life360 reported revenue of US$245m, which is a gain of 75%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Life360?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Life360 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$46m and booked a US$80m accounting loss. But at least it has US$53.7m on the balance sheet to spend on growth, near-term. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Life360 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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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.