LightPath Technologies (NASDAQ:LPTH) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that LightPath Technologies, Inc. (NASDAQ:LPTH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for LightPath Technologies

What Is LightPath Technologies's Debt?

The image below, which you can click on for greater detail, shows that LightPath Technologies had debt of US$2.63m at the end of March 2023, a reduction from US$4.39m over a year. But on the other hand it also has US$9.90m in cash, leading to a US$7.27m net cash position.

How Strong Is LightPath Technologies' Balance Sheet?

According to the last reported balance sheet, LightPath Technologies had liabilities of US$7.45m due within 12 months, and liabilities of US$11.0m due beyond 12 months. Offsetting this, it had US$9.90m in cash and US$4.79m in receivables that were due within 12 months. So it has liabilities totalling US$3.78m more than its cash and near-term receivables, combined.

Given LightPath Technologies has a market capitalization of US$56.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 it is future earnings, more than anything, that will determine LightPath Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year LightPath Technologies had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to US$32m. That's not what we would hope to see.

So How Risky Is LightPath Technologies?

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 LightPath Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$2.3m of cash and made a loss of US$4.6m. Given it only has net cash of US$7.27m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for LightPath Technologies you should be aware of.

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.