Warren Buffett famously said, '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, Loop Industries, Inc. (NASDAQ:LOOP) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Loop Industries
What Is Loop Industries's Net Debt?
The chart below, which you can click on for greater detail, shows that Loop Industries had US$3.33m in debt in August 2023; about the same as the year before. However, it does have US$13.4m in cash offsetting this, leading to net cash of US$10.0m.
How Strong Is Loop Industries' Balance Sheet?
According to the last reported balance sheet, Loop Industries had liabilities of US$3.35m due within 12 months, and liabilities of US$2.97m due beyond 12 months. On the other hand, it had cash of US$13.4m and US$1.20m worth of receivables due within a year. So it actually has US$8.24m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Loop Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
It seems likely shareholders hope that Loop Industries can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Loop Industries?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Loop Industries lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$31m and booked a US$7.3m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$10.0m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 2 warning signs for Loop Industries you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About NasdaqGM:LOOP
Loop Industries
A technology company, focuses on depolymerizing waste polyethylene terephthalate PET plastics and polyester fibers, including plastic bottles, packaging, carpets and textiles of any color, transparency and even ocean plastics that have been degraded by the sun and salt, to its base building blocks.
High growth potential slight.
