Does Louisiana-Pacific (NYSE:LPX) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Louisiana-Pacific Corporation (NYSE:LPX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Louisiana-Pacific

What Is Louisiana-Pacific's Debt?

The chart below, which you can click on for greater detail, shows that Louisiana-Pacific had US$346.0m in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds US$607.0m in cash, so it actually has US$261.0m net cash.

How Healthy Is Louisiana-Pacific's Balance Sheet?

We can see from the most recent balance sheet that Louisiana-Pacific had liabilities of US$427.0m falling due within a year, and liabilities of US$596.0m due beyond that. Offsetting these obligations, it had cash of US$607.0m as well as receivables valued at US$248.0m due within 12 months. So it has liabilities totalling US$168.0m more than its cash and near-term receivables, combined.

Given Louisiana-Pacific has a market capitalization of US$6.08b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Louisiana-Pacific also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Louisiana-Pacific grew its EBIT by 398% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Louisiana-Pacific'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Louisiana-Pacific may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Louisiana-Pacific recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Louisiana-Pacific has US$261.0m in net cash. And we liked the look of last year's 398% year-on-year EBIT growth. So we don't think Louisiana-Pacific's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Louisiana-Pacific .

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.