Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Loop Industries, Inc. (NASDAQ:LOOP) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Loop Industries's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of November 2021 Loop Industries had US$4.20m of debt, an increase on US$2.39m, over one year. However, its balance sheet shows it holds US$55.0m in cash, so it actually has US$50.8m net cash.
How Strong Is Loop Industries' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Loop Industries had liabilities of US$6.31m due within 12 months and liabilities of US$3.32m due beyond that. Offsetting these obligations, it had cash of US$55.0m as well as receivables valued at US$825.4k due within 12 months. So it actually has US$46.2m more liquid assets than total liabilities.
This surplus suggests that Loop Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Loop Industries boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Loop Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
It seems likely shareholders hope that Loop Industries can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Loop Industries?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Loop Industries lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$47m and booked a US$44m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$50.8m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Loop Industries you should be aware of, and 2 of them are potentially serious.
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.
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