Is Lyft (NASDAQ:LYFT) Using Debt In A Risky Way?

Simply Wall St · 10/14 17:55

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.' 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. Importantly, Lyft, Inc. (NASDAQ:LYFT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 Lyft

What Is Lyft's Debt?

As you can see below, at the end of June 2024, Lyft had US$1.01b of debt, up from US$832.2m a year ago. Click the image for more detail. But it also has US$1.80b in cash to offset that, meaning it has US$792.8m net cash.

debt-equity-history-analysis
NasdaqGS:LYFT Debt to Equity History October 14th 2024

A Look At Lyft's Liabilities

The latest balance sheet data shows that Lyft had liabilities of US$3.64b due within a year, and liabilities of US$778.6m falling due after that. Offsetting these obligations, it had cash of US$1.80b as well as receivables valued at US$283.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.34b.

While this might seem like a lot, it is not so bad since Lyft has a market capitalization of US$5.58b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Lyft boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Lyft can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Lyft reported revenue of US$5.1b, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lyft?

Although Lyft had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$368m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Lyft has 1 warning sign we think 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.