Yahoo Finance Here's Why Spirit Technology Solutions (ASX:ST1) Can Manage Its Debt Responsibly
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Spirit Technology Solutions Ltd. (ASX:ST1) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Spirit Technology Solutions
What Is Spirit Technology Solutions's Debt?
As you can see below, at the end of December 2020, Spirit Technology Solutions had AU$5.27m of debt, up from AU$2.99m a year ago. Click the image for more detail. But on the other hand it also has AU$12.9m in cash, leading to a AU$7.63m net cash position.
A Look At Spirit Technology Solutions' Liabilities
The latest balance sheet data shows that Spirit Technology Solutions had liabilities of AU$33.4m due within a year, and liabilities of AU$11.1m falling due after that. On the other hand, it had cash of AU$12.9m and AU$12.8m worth of receivables due within a year. So its liabilities total AU$18.8m more than the combination of its cash and short-term receivables.
Given Spirit Technology Solutions has a market capitalization of AU$191.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Spirit Technology Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Spirit Technology Solutions made a loss at the EBIT level, last year, but improved that to positive EBIT of AU$209k in the last twelve months. 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 Spirit Technology Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Spirit Technology Solutions may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Spirit Technology Solutions actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
We could understand if investors are concerned about Spirit Technology Solutions's liabilities, but we can be reassured by the fact it has has net cash of AU$7.63m. And it impressed us with free cash flow of AU$1.5m, being 709% of its EBIT. So we don't have any problem with Spirit Technology Solutions's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Spirit Technology Solutions you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. 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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