Is Loop Industries (NASDAQ:LOOP) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Loop Industries, Inc. (NASDAQ:LOOP) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Loop Industries

How Much Debt Does Loop Industries Carry?

The image below, which you can click on for greater detail, shows that at August 2021 Loop Industries had debt of US$4.24m, up from US$2.37m in one year. But on the other hand it also has US$65.8m in cash, leading to a US$61.6m net cash position.

How Healthy Is Loop Industries' Balance Sheet?

The latest balance sheet data shows that Loop Industries had liabilities of US$6.15m due within a year, and liabilities of US$3.32m falling due after that. Offsetting these obligations, it had cash of US$65.8m as well as receivables valued at US$1.34m due within 12 months. So it actually has US$57.7m 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. Succinctly put, Loop Industries boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$42m and booked a US$48m accounting loss. But the saving grace is the US$61.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Loop Industries is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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