Stock Analysis

Here's Why Splitit Payments (ASX:SPT) Can Manage Its Debt Despite Losing Money

ASX:SPT
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Splitit Payments Ltd (ASX:SPT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Splitit Payments

How Much Debt Does Splitit Payments Carry?

As you can see below, at the end of December 2020, Splitit Payments had US$69.4m of debt, up from none a year ago. Click the image for more detail. However, it does have US$92.8m in cash offsetting this, leading to net cash of US$23.4m.

debt-equity-history-analysis
ASX:SPT Debt to Equity History March 3rd 2021

A Look At Splitit Payments' Liabilities

Zooming in on the latest balance sheet data, we can see that Splitit Payments had liabilities of US$38.0m due within 12 months and liabilities of US$37.4m due beyond that. Offsetting this, it had US$92.8m in cash and US$51.8m in receivables that were due within 12 months. So it actually has US$69.2m more liquid assets than total liabilities.

This excess liquidity suggests that Splitit Payments is taking a careful approach to debt. 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 Splitit Payments 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 it is future earnings, more than anything, that will determine Splitit Payments's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Splitit Payments wasn't profitable at an EBIT level, but managed to grow its revenue by 307%, to US$6.7m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Splitit Payments?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Splitit Payments lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$67m and booked a US$25m accounting loss. With only US$23.4m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Splitit Payments has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Splitit Payments you should be aware of, and 1 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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