Spirit Technology Solutions (ASX:ST1) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Spirit Technology Solutions Ltd (ASX:ST1) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Spirit Technology Solutions

What Is Spirit Technology Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Spirit Technology Solutions had AU$25.0m of debt, an increase on AU$13.0m, over one year. On the flip side, it has AU$7.02m in cash leading to net debt of about AU$18.0m.

A Look At Spirit Technology Solutions' Liabilities

According to the last reported balance sheet, Spirit Technology Solutions had liabilities of AU$33.3m due within 12 months, and liabilities of AU$32.8m due beyond 12 months. Offsetting this, it had AU$7.02m in cash and AU$10.8m in receivables that were due within 12 months. So its liabilities total AU$48.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the AU$26.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Spirit Technology Solutions would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Spirit Technology Solutions's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Spirit Technology Solutions had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to AU$127m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Spirit Technology Solutions produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$1.5m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$4.4m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Spirit Technology Solutions (of which 1 is potentially serious!) you should know about.

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.

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

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.