Health Check: How Prudently Does LivePerson (NASDAQ:LPSN) Use Debt?

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 LivePerson, Inc. (NASDAQ:LPSN) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LivePerson

What Is LivePerson's Net Debt?

As you can see below, LivePerson had US$470.3m of debt at September 2024, down from US$583.3m a year prior. However, because it has a cash reserve of US$142.1m, its net debt is less, at about US$328.2m.

How Healthy Is LivePerson's Balance Sheet?

We can see from the most recent balance sheet that LivePerson had liabilities of US$168.5m falling due within a year, and liabilities of US$477.6m due beyond that. Offsetting this, it had US$142.1m in cash and US$54.5m in receivables that were due within 12 months. So it has liabilities totalling US$449.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$103.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, LivePerson would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if LivePerson can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year LivePerson had a loss before interest and tax, and actually shrunk its revenue by 22%, to US$335m. That makes us nervous, to say the least.

Caveat Emptor

While LivePerson's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$89m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$38m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for LivePerson (of which 1 is potentially serious!) you should know about.

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.