Health Check: How Prudently Does Loop Industries (NASDAQ:LOOP) Use 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. We can see that Loop Industries, Inc. (NASDAQ:LOOP) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that LOOP is potentially overvalued!

What Is Loop Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Loop Industries had debt of US$3.35m at the end of August 2022, a reduction from US$4.24m over a year. But on the other hand it also has US$23.1m in cash, leading to a US$19.7m net cash position.

How Healthy Is Loop Industries' Balance Sheet?

According to the last reported balance sheet, Loop Industries had liabilities of US$7.16m due within 12 months, and liabilities of US$3.10m due beyond 12 months. On the other hand, it had cash of US$23.1m and US$1.80m worth of receivables due within a year. So it can boast US$14.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Loop Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Loop Industries has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Loop Industries 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Loop Industries can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Loop Industries?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Loop Industries lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$41m of cash and made a loss of US$50m. While this does make the company a bit risky, it's important to remember it has net cash of US$19.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Loop Industries (of which 2 don't sit too well with us!) you should know about.

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.