Is Spenda (ASX:SPX) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Spenda Limited (ASX:SPX) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Spenda

What Is Spenda's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Spenda had debt of AU$4.32m, up from none in one year. However, its balance sheet shows it holds AU$13.0m in cash, so it actually has AU$8.72m net cash.

A Look At Spenda's Liabilities

According to the balance sheet data, Spenda had liabilities of AU$9.46m due within 12 months, but no longer term liabilities. On the other hand, it had cash of AU$13.0m and AU$9.99m worth of receivables due within a year. So it can boast AU$13.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Spenda's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Spenda boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Spenda will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Spenda wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to AU$1.2m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Spenda?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Spenda had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$7.6m of cash and made a loss of AU$16m. Given it only has net cash of AU$8.72m, the company may need to raise more capital if it doesn't reach break-even soon. Spenda'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. We've identified 6 warning signs with Spenda (at least 3 which are a bit concerning) , and understanding them should be part of your investment process.

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.