Yahoo Finance Despite Lacking Profits Splitit Payments (ASX:SPT) Seems To Be On Top Of Its Debt
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Splitit Payments Ltd (ASX:SPT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Splitit Payments
What Is Splitit Payments's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Splitit Payments had debt of US$60.4m, up from US$39.5m in one year. However, its balance sheet shows it holds US$66.4m in cash, so it actually has US$6.04m net cash.
A Look At Splitit Payments' Liabilities
According to the last reported balance sheet, Splitit Payments had liabilities of US$4.30m due within 12 months, and liabilities of US$60.4m due beyond 12 months. Offsetting these obligations, it had cash of US$66.4m as well as receivables valued at US$52.9m due within 12 months. So it actually has US$54.6m more liquid assets than total liabilities.
This luscious liquidity implies that Splitit Payments' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Splitit Payments has more cash than debt is arguably a good indication that 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 Splitit Payments'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.
In the last year Splitit Payments wasn't profitable at an EBIT level, but managed to grow its revenue by 170%, to US$9.2m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Splitit Payments?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Splitit Payments lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$49m of cash and made a loss of US$35m. Given it only has net cash of US$6.04m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Splitit Payments has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Splitit Payments (of which 1 can't be ignored!) you should know about.
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.
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.
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