LifeStance Health Group (NASDAQ:LFST) Is Making Moderate Use Of Debt

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.' 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 LifeStance Health Group, Inc. (NASDAQ:LFST) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for LifeStance Health Group

How Much Debt Does LifeStance Health Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 LifeStance Health Group had US$282.0m of debt, an increase on US$251.0m, over one year. However, it does have US$103.7m in cash offsetting this, leading to net debt of about US$178.3m.

How Healthy Is LifeStance Health Group's Balance Sheet?

We can see from the most recent balance sheet that LifeStance Health Group had liabilities of US$217.5m falling due within a year, and liabilities of US$453.3m due beyond that. On the other hand, it had cash of US$103.7m and US$158.2m worth of receivables due within a year. So it has liabilities totalling US$409.0m more than its cash and near-term receivables, combined.

Given LifeStance Health Group has a market capitalization of US$2.85b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if LifeStance Health Group 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 LifeStance Health Group wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$1.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though LifeStance Health Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$53m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$95m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with LifeStance Health Group .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.