David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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, SpaceandPeople plc (LON:SAL) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is SpaceandPeople's Net Debt?
As you can see below, at the end of June 2019, SpaceandPeople had UK£500.0k of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has UK£1.06m in cash, leading to a UK£556.0k net cash position.
A Look At SpaceandPeople's Liabilities
The latest balance sheet data shows that SpaceandPeople had liabilities of UK£3.45m due within a year, and liabilities of UK£601.0k falling due after that. Offsetting these obligations, it had cash of UK£1.06m as well as receivables valued at UK£3.47m due within 12 months. So it actually has UK£474.0k more liquid assets than total liabilities.
This excess liquidity suggests that SpaceandPeople is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SpaceandPeople 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 ultimately the future profitability of the business will decide if SpaceandPeople can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year SpaceandPeople had negative earnings before interest and tax, and actually shrunk its revenue by 13%, to UK£7.8m. We would much prefer see growth.
So How Risky Is SpaceandPeople?
While SpaceandPeople lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£142k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like SpaceandPeople I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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