In This Article:
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.' 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. As with many other companies Loop Industries, Inc. (NASDAQ:LOOP) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Loop Industries
What Is Loop Industries's Net Debt?
As you can see below, at the end of November 2021, Loop Industries had US$4.20m of debt, up from US$2.39m a year ago. Click the image for more detail. But on the other hand it also has US$55.0m in cash, leading to a US$50.8m net cash position.
How Strong Is Loop Industries' Balance Sheet?
According to the last reported balance sheet, Loop Industries had liabilities of US$6.31m due within 12 months, and liabilities of US$3.32m due beyond 12 months. Offsetting this, it had US$55.0m in cash and US$825.4k in receivables that were due within 12 months. So it actually has US$46.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Loop Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Loop Industries has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.