Life360 (ASX:360) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Life360, Inc. (ASX:360) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Life360

How Much Debt Does Life360 Carry?

As you can see below, at the end of December 2021, Life360 had US$12.5m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$231.0m in cash, leading to a US$218.5m net cash position.

A Look At Life360's Liabilities

The latest balance sheet data shows that Life360 had liabilities of US$41.4m due within a year, and liabilities of US$10.9m falling due after that. Offsetting these obligations, it had cash of US$231.0m as well as receivables valued at US$12.9m due within 12 months. So it can boast US$191.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Life360's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Life360 has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Life360 wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to US$113m. 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$12m of cash and made a loss of US$34m. However, it has net cash of US$218.5m, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Life360 you should know about.

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.