Is Loop Industries (NASDAQ:LOOP) Using Debt Sensibly?

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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Loop Industries

What Is Loop Industries's Net Debt?

As you can see below, Loop Industries had US$3.32m of debt, at November 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$9.37m in cash, leading to a US$6.05m net cash position.

How Healthy Is Loop Industries' Balance Sheet?

We can see from the most recent balance sheet that Loop Industries had liabilities of US$3.06m falling due within a year, and liabilities of US$2.81m due beyond that. Offsetting this, it had US$9.37m in cash and US$411.0k in receivables that were due within 12 months. So it actually has US$3.90m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Loop Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 we do note that Loop Industries had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$30m and booked a US$11m accounting loss. Given it only has net cash of US$6.05m, the company may need to raise more capital if it doesn't reach break-even soon. 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. 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. We've identified 2 warning signs with Loop Industries , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.