Yahoo Finance Sportech (LON:SPO) Has Debt But No Earnings; Should You Worry?
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. We note that Sportech PLC (LON:SPO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Sportech
What Is Sportech's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Sportech had debt of UK£500.0k, up from none in one year. However, its balance sheet shows it holds UK£14.9m in cash, so it actually has UK£14.4m net cash.
A Look At Sportech's Liabilities
We can see from the most recent balance sheet that Sportech had liabilities of UK£23.6m falling due within a year, and liabilities of UK£9.69m due beyond that. Offsetting this, it had UK£14.9m in cash and UK£10.6m in receivables that were due within 12 months. So its liabilities total UK£7.80m more than the combination of its cash and short-term receivables.
Since publicly traded Sportech shares are worth a total of UK£61.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sportech also has more cash than debt, so we're pretty confident 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 Sportech 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.
Over 12 months, Sportech saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.
So How Risky Is Sportech?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sportech had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of UK£2.4m and booked a UK£5.8m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of UK£15m. That means it could keep spending at its current rate for more than five years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Sportech I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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