Yahoo Finance Is Spark Networks (NYSEMKT:LOV) Using Too Much Debt?
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'. 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. As with many other companies Spark Networks SE (NYSEMKT:LOV) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Spark Networks
What Is Spark Networks's Debt?
The image below, which you can click on for greater detail, shows that Spark Networks had debt of €11.3m at the end of June 2019, a reduction from €14.0m over a year. But it also has €12.8m in cash to offset that, meaning it has €1.51m net cash.
A Look At Spark Networks's Liabilities
Zooming in on the latest balance sheet data, we can see that Spark Networks had liabilities of €47.3m due within 12 months and liabilities of €1.92m due beyond that. On the other hand, it had cash of €12.8m and €4.09m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €32.4m.
While this might seem like a lot, it is not so bad since Spark Networks has a market capitalization of €120.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Spark Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Spark Networks made a loss at the EBIT level, last year, it was also good to see that it generated €3.9m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Spark Networks's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Spark Networks has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Spark Networks actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
Although Spark Networks's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.51m. And it impressed us with free cash flow of €9.5m, being 240% of its EBIT. So is Spark Networks's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Spark Networks you should be aware of, and 2 of them make us uncomfortable.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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