Is Swoop Holdings (ASX:SWP) A Risky Investment?

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. We can see that Swoop Holdings Limited (ASX:SWP) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 think about a company's use of debt, we first look at cash and debt together.

What Is Swoop Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Swoop Holdings had debt of AU$17.7m at the end of December 2024, a reduction from AU$20.2m over a year. On the flip side, it has AU$5.47m in cash leading to net debt of about AU$12.2m.

A Look At Swoop Holdings' Liabilities

According to the last reported balance sheet, Swoop Holdings had liabilities of AU$28.0m due within 12 months, and liabilities of AU$26.5m due beyond 12 months. Offsetting these obligations, it had cash of AU$5.47m as well as receivables valued at AU$6.87m due within 12 months. So its liabilities total AU$42.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the AU$22.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Swoop Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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 Swoop Holdings 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.

View our latest analysis for Swoop Holdings

In the last year Swoop Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to AU$87m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Swoop Holdings 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 a very considerable AU$3.9m at the EBIT level. 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$10m 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Swoop Holdings (2 make us uncomfortable) you should be aware of.

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.

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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.