Is Louisiana-Pacific (NYSE:LPX) A Risky Investment?

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.' 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. As with many other companies Louisiana-Pacific Corporation (NYSE:LPX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Louisiana-Pacific

What Is Louisiana-Pacific's Debt?

As you can see below, Louisiana-Pacific had US$339.0m of debt, at September 2020, 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$420.0m in cash, leading to a US$81.0m net cash position.

A Look At Louisiana-Pacific's Liabilities

Zooming in on the latest balance sheet data, we can see that Louisiana-Pacific had liabilities of US$244.0m due within 12 months and liabilities of US$576.0m due beyond that. Offsetting these obligations, it had cash of US$420.0m as well as receivables valued at US$228.0m due within 12 months. So its liabilities total US$172.0m more than the combination of its cash and short-term receivables.

Of course, Louisiana-Pacific has a market capitalization of US$4.16b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Louisiana-Pacific boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Louisiana-Pacific grew its EBIT by 321% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Louisiana-Pacific has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Louisiana-Pacific recorded free cash flow worth 60% 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

We could understand if investors are concerned about Louisiana-Pacific's liabilities, but we can be reassured by the fact it has has net cash of US$81.0m. And it impressed us with its EBIT growth of 321% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Louisiana-Pacific (including 1 which makes us a bit uncomfortable) .

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. 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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