Does Sportscene Group (CVE:SPS.A) Have A Healthy Balance Sheet?

By
Simply Wall St
Published
November 23, 2021
TSXV:SPS.A
Source: Shutterstock

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.' 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 can see that Sportscene Group Inc. (CVE:SPS.A) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sportscene Group

What Is Sportscene Group's Net Debt?

The image below, which you can click on for greater detail, shows that at May 2021 Sportscene Group had debt of CA$27.3m, up from CA$21.3m in one year. However, it does have CA$8.45m in cash offsetting this, leading to net debt of about CA$18.9m.

debt-equity-history-analysis
TSXV:SPS.A Debt to Equity History November 23rd 2021

A Look At Sportscene Group's Liabilities

The latest balance sheet data shows that Sportscene Group had liabilities of CA$18.2m due within a year, and liabilities of CA$50.9m falling due after that. On the other hand, it had cash of CA$8.45m and CA$9.33m worth of receivables due within a year. So its liabilities total CA$51.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$61.8m, so it does suggest shareholders should keep an eye on Sportscene Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sportscene Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sportscene Group had a loss before interest and tax, and actually shrunk its revenue by 50%, to CA$61m. To be frank that doesn't bode well.

Caveat Emptor

While Sportscene Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CA$7.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$281k of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Sportscene Group (including 2 which are significant) .

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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