Health Check: How Prudently Does SPC Global Holdings (ASX:SPG) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that SPC Global Holdings Ltd (ASX:SPG) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SPC Global Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 SPC Global Holdings had AU$111.3m of debt, an increase on AU$94.4m, over one year. However, because it has a cash reserve of AU$2.58m, its net debt is less, at about AU$108.7m.

A Look At SPC Global Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that SPC Global Holdings had liabilities of AU$194.2m due within 12 months and liabilities of AU$167.9m due beyond that. Offsetting this, it had AU$2.58m in cash and AU$53.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$305.6m.

This deficit casts a shadow over the AU$60.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, SPC Global Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SPC Global Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

See our latest analysis for SPC Global Holdings

In the last year SPC Global Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to AU$249m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, SPC Global Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$4.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized AU$28m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SPC Global Holdings (of which 1 is potentially serious!) you should know about.

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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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.