Is LifeVantage (NASDAQ:LFVN) Using Too Much Debt?

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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.’ 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. LifeVantage Corporation (NASDAQ:LFVN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, 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 LifeVantage

What Is LifeVantage’s Net Debt?

As you can see below, LifeVantage had US$1.94m of debt at March 2019, down from US$5.97m a year prior. But on the other hand it also has US$15.9m in cash, leading to a US$14.0m net cash position.

NasdaqCM:LFVN Historical Debt, July 4th 2019
NasdaqCM:LFVN Historical Debt, July 4th 2019

A Look At LifeVantage’s Liabilities

Zooming in on the latest balance sheet data, we can see that LifeVantage had liabilities of US$27.5m due within 12 months and liabilities of US$1.88m due beyond that. Offsetting these obligations, it had cash of US$15.9m as well as receivables valued at US$6.73m due within 12 months. So its liabilities total US$6.71m more than the combination of its cash and short-term receivables.

Since publicly traded LifeVantage shares are worth a total of US$189.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Given that LifeVantage has more cash than debt, we’re pretty confident it can manage its debt safely.

Also good is that LifeVantage grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since LifeVantage will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While LifeVantage has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, LifeVantage actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company’s total liabilities, it is very reassuring that LifeVantage has US$14m in net cash. And it impressed us with free cash flow of US$13m, being 100% of its EBIT. So we don’t think LifeVantage’s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of LifeVantage’s earnings per share history for free.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.