Is Spacetalk (ASX:SPA) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Spacetalk Limited (ASX:SPA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Spacetalk

What Is Spacetalk's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Spacetalk had AU$2.74m of debt, an increase on none, over one year. However, it does have AU$9.67m in cash offsetting this, leading to net cash of AU$6.92m.

How Healthy Is Spacetalk's Balance Sheet?

We can see from the most recent balance sheet that Spacetalk had liabilities of AU$4.08m falling due within a year, and liabilities of AU$4.62m due beyond that. Offsetting these obligations, it had cash of AU$9.67m as well as receivables valued at AU$3.00m due within 12 months. So it actually has AU$3.97m more liquid assets than total liabilities.

This luscious liquidity implies that Spacetalk's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Spacetalk 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 you can't view debt in total isolation; since Spacetalk will need earnings to service that debt. 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, Spacetalk reported revenue of AU$19m, which is a gain of 73%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Spacetalk?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Spacetalk had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$5.7m and booked a AU$3.1m accounting loss. However, it has net cash of AU$6.92m, so it has a bit of time before it will need more capital. Spacetalk's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example, we've discovered 4 warning signs for Spacetalk (2 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.