Yahoo Finance Is Spacetalk (ASX:SPA) A Risky Investment?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Spacetalk Limited (ASX:SPA) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Spacetalk
What Is Spacetalk's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Spacetalk had AU$2.74m of debt, an increase on none, over one year. But it also has AU$9.67m in cash to offset that, meaning it has AU$6.92m net cash.
How Strong Is Spacetalk's Balance Sheet?
We can see from the most recent balance sheet that Spacetalk had liabilities of AU$4.08m falling due within a year, and liabilities of AU$4.62m due beyond that. Offsetting this, it had AU$9.67m in cash and AU$3.00m in receivables that were due within 12 months. So it actually has AU$3.97m more liquid assets than total liabilities.
This surplus suggests that Spacetalk has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Spacetalk 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 it is Spacetalk's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Spacetalk wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to AU$19m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Spacetalk?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Spacetalk had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$5.7m and booked a AU$3.1m accounting loss. However, it has net cash of AU$6.92m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Spacetalk may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example Spacetalk has 3 warning signs (and 1 which is a bit unpleasant) we think 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.
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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.
