Loop Industries (NASDAQ:LOOP) Has Debt But No Earnings; Should You Worry?

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. Importantly, Loop Industries, Inc. (NASDAQ:LOOP) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Loop Industries

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$3.29m at the end of November 2022, a reduction from US$4.20m over a year. But it also has US$21.6m in cash to offset that, meaning it has US$18.3m net cash.

How Healthy Is Loop Industries' Balance Sheet?

According to the last reported balance sheet, Loop Industries had liabilities of US$8.02m due within 12 months, and liabilities of US$3.24m due beyond 12 months. Offsetting this, it had US$21.6m in cash and US$1.61m in receivables that were due within 12 months. So it can boast US$12.0m 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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$36m and booked a US$41m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$18.3m. That means it could keep spending at its current rate for more than two years. 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. To that end, you should be aware of the 2 warning signs we've spotted with Loop Industries .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.