Here's Why Smart Parking (ASX:SPZ) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for Smart Parking

How Much Debt Does Smart Parking Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Smart Parking had AU$2.65m of debt, an increase on none, over one year. But it also has AU$9.47m in cash to offset that, meaning it has AU$6.82m net cash.

How Healthy Is Smart Parking's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Smart Parking had liabilities of AU$8.41m due within 12 months and liabilities of AU$12.6m due beyond that. On the other hand, it had cash of AU$9.47m and AU$8.03m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$3.53m.

Since publicly traded Smart Parking shares are worth a total of AU$65.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Smart Parking boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Smart Parking improved its EBIT from a last year's loss to a positive AU$2.0m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Smart Parking may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Smart Parking burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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$6.82m. So while Smart Parking does not have a great balance sheet, it's certainly not too bad. 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 Smart Parking is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

If you’re looking to trade Smart Parking, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.