Is Spenda (ASX:SPX) Using Too Much Debt?

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. We can see that Spenda Limited (ASX:SPX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Spenda

What Is Spenda's Net Debt?

As you can see below, at the end of December 2021, Spenda had AU$4.32m of debt, up from none a year ago. Click the image for more detail. But it also has AU$13.0m in cash to offset that, meaning it has AU$8.72m net cash.

How Healthy Is Spenda's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Spenda had liabilities of AU$9.46m due within 12 months and no liabilities due beyond that. 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.

It's good to see that Spenda has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 it is Spenda's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Spenda reported revenue of AU$1.2m, which is a gain of 67%, although it did not report any earnings before interest and tax. 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 the fact is that over the last twelve months Spenda lost money at the earnings before interest and tax (EBIT) line. 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. With very solid revenue growth in the last year, Spenda may be on a path to profitability. 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. However, not all investment risk resides within the balance sheet - far from it. For example Spenda has 6 warning signs (and 4 which make us uncomfortable) we think 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.