Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Lyft, Inc. (NASDAQ:LYFT) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Lyft Carry?
As you can see below, at the end of June 2021, Lyft had US$700.9m of debt, up from US$663.0m a year ago. Click the image for more detail. However, it does have US$2.25b in cash offsetting this, leading to net cash of US$1.54b.
How Strong Is Lyft’s Balance Sheet?
According to the last reported balance sheet, Lyft had liabilities of US$2.29b due within 12 months, and liabilities of US$915.1m due beyond 12 months. On the other hand, it had cash of US$2.25b and US$117.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$843.5m.
Since publicly traded Lyft shares are worth a very impressive total of US$18.6b, it seems unlikely that this level of liabilities would be a major 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, Lyft also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lyft’s ability to maintain a healthy balance sheet going forward.
In the last year Lyft had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$2.4b. To be frank that doesn’t bode well.
So How Risky Is Lyft?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lyft had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$595m of cash and made a loss of US$1.6b. But the saving grace is the US$1.54b on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow.