Does Smart Parking (ASX:SPZ) Have A Healthy Balance Sheet?

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 Smart Parking Limited (ASX:SPZ) 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Smart Parking

How Much Debt Does Smart Parking Carry?

The chart below, which you can click on for greater detail, shows that Smart Parking had AU$2.56m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds AU$11.8m in cash, so it actually has AU$9.21m net cash.

A Look At Smart Parking's Liabilities

Zooming in on the latest balance sheet data, we can see that Smart Parking had liabilities of AU$11.3m due within 12 months and liabilities of AU$15.1m due beyond that. Offsetting these obligations, it had cash of AU$11.8m as well as receivables valued at AU$8.49m due within 12 months. So its liabilities total AU$6.19m more than the combination of its cash and short-term receivables.

Of course, Smart Parking has a market capitalization of AU$63.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Smart Parking boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Smart Parking's EBIT launched higher than Elon Musk, gaining a whopping 325% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Smart Parking'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Smart Parking has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Smart Parking actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Smart Parking's liabilities, but we can be reassured by the fact it has has net cash of AU$9.21m. The cherry on top was that in converted 253% of that EBIT to free cash flow, bringing in AU$7.0m. So we don't think Smart Parking's use of debt is 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. Case in point: We've spotted 2 warning signs for Smart Parking you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.