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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Lyft, Inc. (NASDAQ:LYFT) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

How Much Debt Does Lyft Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Lyft had debt of US$971.5m, up from US$823.3m in one year. But on the other hand it also has US$1.67b in cash, leading to a US$694.1m net cash position.

A Look At Lyft's Liabilities

The latest balance sheet data shows that Lyft had liabilities of US$3.12b due within a year, and liabilities of US$1.15b falling due after that. Offsetting this, it had US$1.67b in cash and US$281.8m in receivables that were due within 12 months. So its liabilities total US$2.32b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Lyft is worth US$6.89b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

In the last year Lyft wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to US$4.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lyft?

Statistically speaking companies that lose money are riskier than those that make money. 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$153k of cash and made a loss of US$184m. While this does make the company a bit risky, it's important to remember it has net cash of US$694.1m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 3 warning signs we've spotted with Lyft .

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.