Is Lightspeed Commerce (TSE:LSPD) Using Too Much Debt?

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.' 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. Importantly, Lightspeed Commerce Inc. (TSE:LSPD) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, 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.

View our latest analysis for Lightspeed Commerce

What Is Lightspeed Commerce's Debt?

The chart below, which you can click on for greater detail, shows that Lightspeed Commerce had US$29.8m in debt in September 2021; about the same as the year before. But on the other hand it also has US$1.18b in cash, leading to a US$1.15b net cash position.

How Strong Is Lightspeed Commerce's Balance Sheet?

We can see from the most recent balance sheet that Lightspeed Commerce had liabilities of US$144.5m falling due within a year, and liabilities of US$66.4m due beyond that. Offsetting this, it had US$1.18b in cash and US$27.4m in receivables that were due within 12 months. So it actually has US$996.7m more liquid assets than total liabilities.

This surplus suggests that Lightspeed Commerce is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Lightspeed Commerce 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 Lightspeed Commerce'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.

In the last year Lightspeed Commerce wasn't profitable at an EBIT level, but managed to grow its revenue by 159%, to US$389m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Lightspeed Commerce?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Lightspeed Commerce had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$111m and booked a US$193m accounting loss. But the saving grace is the US$1.15b on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Lightspeed Commerce has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should be aware of the 3 warning signs we've spotted with Lightspeed Commerce .

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.