LivePerson (NASDAQ:LPSN) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that LivePerson, Inc. (NASDAQ:LPSN) does use debt in its business. But the real question is whether this debt is making the company risky.

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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for LivePerson

How Much Debt Does LivePerson Carry?

You can click the graphic below for the historical numbers, but it shows that LivePerson had US$582.6m of debt in June 2023, down from US$735.5m, one year before. However, it does have US$213.8m in cash offsetting this, leading to net debt of about US$368.9m.

How Strong Is LivePerson's Balance Sheet?

According to the last reported balance sheet, LivePerson had liabilities of US$291.0m due within 12 months, and liabilities of US$517.1m due beyond 12 months. On the other hand, it had cash of US$213.8m and US$105.2m worth of receivables due within a year. So its liabilities total US$489.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$396.0m, we think shareholders really should watch LivePerson's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, LivePerson made a loss at the EBIT level, and saw its revenue drop to US$457m, which is a fall of 9.4%. We would much prefer see growth.

Caveat Emptor

Importantly, LivePerson had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$109m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$73m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - LivePerson has 4 warning signs we think you should be aware of.

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.