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.' 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. Importantly, LivePerson, Inc. (NASDAQ:LPSN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is LivePerson's Net Debt?
As you can see below, at the end of September 2021, LivePerson had US$565.1m of debt, up from US$187.1m a year ago. Click the image for more detail. But it also has US$633.0m in cash to offset that, meaning it has US$68.0m net cash.
A Look At LivePerson's Liabilities
Zooming in on the latest balance sheet data, we can see that LivePerson had liabilities of US$226.4m due within 12 months and liabilities of US$580.4m due beyond that. Offsetting these obligations, it had cash of US$633.0m as well as receivables valued at US$83.2m due within 12 months. So its liabilities total US$90.6m more than the combination of its cash and short-term receivables.
Given LivePerson has a market capitalization of US$3.43b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year LivePerson wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$448m. With any luck the company will be able to grow its way to profitability.
So How Risky Is LivePerson?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that LivePerson had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$12m of cash and made a loss of US$88m. However, it has net cash of US$68.0m, 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for LivePerson (of which 1 is concerning!) 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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