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

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. As with many other companies Lightspeed Commerce Inc. (TSE:LSPD) makes use of debt. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lightspeed Commerce

What Is Lightspeed Commerce's Debt?

As you can see below, Lightspeed Commerce had US$29.8m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$966.7m in cash to offset that, meaning it has US$936.8m net cash.

How Strong Is Lightspeed Commerce's Balance Sheet?

According to the last reported balance sheet, Lightspeed Commerce had liabilities of US$145.6m due within 12 months, and liabilities of US$62.3m due beyond 12 months. Offsetting these obligations, it had cash of US$966.7m as well as receivables valued at US$45.4m due within 12 months. So it actually has US$804.2m more liquid assets than total liabilities.

This excess liquidity suggests that Lightspeed Commerce is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Lightspeed Commerce 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 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.

Over 12 months, Lightspeed Commerce reported revenue of US$484m, which is a gain of 176%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Lightspeed Commerce?

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 Lightspeed Commerce had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$109m of cash and made a loss of US$216m. While this does make the company a bit risky, it's important to remember it has net cash of US$936.8m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Lightspeed Commerce you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.