Stock Analysis

Louisiana-Pacific (NYSE:LPX) Could Easily Take On More Debt

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NYSE:LPX
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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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Louisiana-Pacific

What Is Louisiana-Pacific's Net Debt?

As you can see below, Louisiana-Pacific had US$346.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$503.0m in cash offsetting this, leading to net cash of US$157.0m.

debt-equity-history-analysis
NYSE:LPX Debt to Equity History August 31st 2022

How Strong Is Louisiana-Pacific's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Louisiana-Pacific had liabilities of US$464.0m due within 12 months and liabilities of US$596.0m due beyond that. On the other hand, it had cash of US$503.0m and US$219.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$338.0m.

Since publicly traded Louisiana-Pacific shares are worth a total of US$4.05b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

And we also note warmly that Louisiana-Pacific grew its EBIT by 12% last year, making its debt load easier to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$157.0m. And it impressed us with free cash flow of US$1.2b, being 74% of its EBIT. So we don't think Louisiana-Pacific's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Louisiana-Pacific (1 is potentially serious!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we're helping make it simple.

Find out whether Louisiana-Pacific is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NYSE:LPX

Louisiana-Pacific

Louisiana-Pacific Corporation, together with its subsidiaries, manufactures and markets building products primarily for use in new home construction, repair and remodeling, and outdoor structure markets.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance2
Financial Health6
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and slightly overvalued.