Yahoo Finance Is Spenda (ASX:SPX) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Spenda Limited (ASX:SPX) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 Spenda had AU$4.32m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$13.0m in cash, so it actually has AU$8.72m net cash.
How Healthy Is Spenda's Balance Sheet?
According to the balance sheet data, Spenda had liabilities of AU$9.46m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of AU$13.0m as well as receivables valued at AU$9.99m due within 12 months. So it can boast AU$13.6m more liquid assets than total liabilities.
This surplus suggests that Spenda is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Spenda has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Spenda'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.
Over 12 months, Spenda reported revenue of AU$1.2m, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Spenda?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Spenda 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$7.6m and booked a AU$16m accounting loss. With only AU$8.72m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Spenda may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example Spenda has 6 warning signs (and 4 which can't be ignored) we think you should know about.
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.
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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.
