Here's Why Spenda (ASX:SPX) Can Manage Its Debt Despite Losing Money

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Spenda Limited (ASX:SPX) makes use of debt. 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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Spenda

How Much Debt Does Spenda Carry?

As you can see below, at the end of December 2022, Spenda had AU$8.06m of debt, up from AU$4.32m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$4.34m, its net debt is less, at about AU$3.73m.

How Strong Is Spenda's Balance Sheet?

We can see from the most recent balance sheet that Spenda had liabilities of AU$2.30m falling due within a year, and liabilities of AU$8.64m due beyond that. On the other hand, it had cash of AU$4.34m and AU$14.0m worth of receivables due within a year. So it actually has AU$7.41m more liquid assets than total liabilities.

This excess liquidity suggests that Spenda 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Spenda's earnings that will influence how the balance sheet holds up in the future. 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.

It seems likely shareholders hope that Spenda can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Over the last twelve months Spenda produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$15m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. So it's risky, but with some potential. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Spenda (of which 2 are potentially serious!) you should know about.

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.