Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Limited expenses (ASX:SPX) uses debt in its business. But should shareholders worry about its use of debt?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Spenda
What is Spenda’s net debt?
As you can see below, at the end of December 2021, Spenda had A$4.32 million in debt, up from none a year ago. Click on the image for more details. But he also has A$13.0 million in cash to offset that, meaning he has a net cash of A$8.72 million.
How healthy is Spenda’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Spenda had liabilities of A$9.46 million due within 12 months and no liabilities due beyond that. On the other hand, it had cash of A$13.0 million and A$9.99 million of receivables due within one year. He can therefore boast of having 13.6 million Australian dollars more in cash than total Passives.
It’s good to see that Spenda has plenty of cash on its balance sheet, suggesting careful liability management. Due to her strong net asset position, she is unlikely to run into problems with her lenders. In short, Spenda has clean cash, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Spenda that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Spenda reported revenue of A$1.2 million, a 67% gain, although it reported no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.
So how risky is spending?
Statistically speaking, businesses that lose money are riskier than those that make money. And the fact is that over the past twelve months, Spenda has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, he spent A$7.6 million in cash and suffered a loss of A$16 million. Given that it only has net cash of A$8.72 million, the company may need to raise more capital if it does not break even soon. With very solid revenue growth over the past year, Spenda could be on the road to profitability. By investing before these profits, shareholders take on more risk in the hope of greater rewards. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example Spenda has 6 warning signs (and 4 that make us uncomfortable) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.