Does LightPath Technologies (NASDAQ:LPTH) Have A 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. We note that LightPath Technologies, Inc. (NASDAQ:LPTH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for LightPath Technologies

What Is LightPath Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that LightPath Technologies had US$4.39m of debt in March 2022, down from US$5.14m, one year before. However, its balance sheet shows it holds US$5.24m in cash, so it actually has US$849.3k net cash.

How Healthy Is LightPath Technologies' Balance Sheet?

We can see from the most recent balance sheet that LightPath Technologies had liabilities of US$7.29m falling due within a year, and liabilities of US$13.2m due beyond that. Offsetting these obligations, it had cash of US$5.24m as well as receivables valued at US$5.01m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.2m.

While this might seem like a lot, it is not so bad since LightPath Technologies has a market capitalization of US$30.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, LightPath Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LightPath Technologies 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, LightPath Technologies made a loss at the EBIT level, and saw its revenue drop to US$35m, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is LightPath Technologies?

While LightPath Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$78k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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, we've discovered 2 warning signs for LightPath Technologies that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.