Louisiana-Pacific (NYSE:LPX) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Louisiana-Pacific Corporation (NYSE:LPX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 December 2022; about the same as the year before. However, it does have US$369.0m in cash offsetting this, leading to net cash of US$23.0m.

How Healthy Is Louisiana-Pacific's Balance Sheet?

According to the last reported balance sheet, Louisiana-Pacific had liabilities of US$336.0m due within 12 months, and liabilities of US$581.0m due beyond 12 months. On the other hand, it had cash of US$369.0m and US$127.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$421.0m.

Of course, Louisiana-Pacific has a market capitalization of US$3.87b, so these liabilities are probably manageable. 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.

The modesty of its debt load may become crucial for Louisiana-Pacific if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Louisiana-Pacific produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Louisiana-Pacific does have more liabilities than liquid assets, it also has net cash of US$23.0m. And it impressed us with free cash flow of US$730m, being 70% of its EBIT. So we are not troubled with Louisiana-Pacific's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Louisiana-Pacific (1 is a bit unpleasant!) 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.

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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.