Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that LivePerson, Inc. (NASDAQ:LPSN) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is LivePerson's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 LivePerson had debt of US$187.1m, up from US$176.4m in one year. But on the other hand it also has US$198.7m in cash, leading to a US$11.5m net cash position.
How Healthy Is LivePerson's Balance Sheet?
We can see from the most recent balance sheet that LivePerson had liabilities of US$206.4m falling due within a year, and liabilities of US$198.2m due beyond that. On the other hand, it had cash of US$198.7m and US$66.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$139.5m.
Given LivePerson has a market capitalization of US$4.35b, 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, LivePerson also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$344m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is LivePerson?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year LivePerson had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$29m of cash and made a loss of US$122m. However, it has net cash of US$11.5m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, LivePerson may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 3 warning signs we've spotted with LivePerson .
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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What are the risks and opportunities for LivePerson?
Shareholders have been diluted in the past year
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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