Is Swoop Holdings (ASX:SWP) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Swoop Holdings Limited (ASX:SWP) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Swoop Holdings

What Is Swoop Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Swoop Holdings had AU$20.2m of debt, an increase on AU$19.2m, over one year. On the flip side, it has AU$16.2m in cash leading to net debt of about AU$4.02m.

How Strong Is Swoop Holdings' Balance Sheet?

The latest balance sheet data shows that Swoop Holdings had liabilities of AU$31.3m due within a year, and liabilities of AU$31.8m falling due after that. Offsetting these obligations, it had cash of AU$16.2m as well as receivables valued at AU$7.32m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$39.6m.

This deficit is considerable relative to its market capitalization of AU$45.8m, so it does suggest shareholders should keep an eye on Swoop Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Swoop Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Swoop Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to AU$85m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Swoop Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$765k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$2.3m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. For example Swoop Holdings has 2 warning signs (and 1 which is significant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.