Is Spirit Technology Solutions (ASX:ST1) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Spirit Technology Solutions Ltd (ASX:ST1) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

What Is Spirit Technology Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Spirit Technology Solutions had AU$25.5m of debt in December 2024, down from AU$33.0m, one year before. On the flip side, it has AU$11.9m in cash leading to net debt of about AU$13.6m.

A Look At Spirit Technology Solutions' Liabilities

According to the last reported balance sheet, Spirit Technology Solutions had liabilities of AU$45.3m due within 12 months, and liabilities of AU$34.4m due beyond 12 months. Offsetting these obligations, it had cash of AU$11.9m as well as receivables valued at AU$15.5m due within 12 months. So its liabilities total AU$52.3m more than the combination of its cash and short-term receivables.

Spirit Technology Solutions has a market capitalization of AU$88.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Spirit Technology Solutions 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.

See our latest analysis for Spirit Technology Solutions

In the last year Spirit Technology Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to AU$133m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Spirit Technology Solutions still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$199k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of AU$7.0m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Spirit Technology Solutions is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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.