Spirit Technology Solutions (ASX:ST1) Is Carrying A Fair Bit Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Spirit Technology Solutions Ltd (ASX:ST1) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Spirit Technology Solutions

How Much Debt Does Spirit Technology Solutions Carry?

As you can see below, Spirit Technology Solutions had AU$25.5m of debt at December 2024, down from AU$33.0m a year prior. However, it does have AU$11.9m in cash offsetting this, leading to net debt of about AU$13.6m.

How Strong Is Spirit Technology Solutions' Balance Sheet?

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 it has liabilities totalling AU$52.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Spirit Technology Solutions has a market capitalization of AU$107.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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

Even though Spirit Technology Solutions managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost AU$199k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. 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. 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. To that end, you should learn about the 3 warning signs we've spotted with Spirit Technology Solutions (including 2 which shouldn't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.