Is LifeSpeak (TSE:LSPK) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies LifeSpeak Inc. (TSE:LSPK) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LifeSpeak

What Is LifeSpeak's Debt?

The image below, which you can click on for greater detail, shows that LifeSpeak had debt of CA$80.0m at the end of September 2024, a reduction from CA$85.7m over a year. However, it does have CA$1.75m in cash offsetting this, leading to net debt of about CA$78.2m.

A Look At LifeSpeak's Liabilities

The latest balance sheet data shows that LifeSpeak had liabilities of CA$90.7m due within a year, and liabilities of CA$1.21m falling due after that. On the other hand, it had cash of CA$1.75m and CA$4.78m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$85.4m.

The deficiency here weighs heavily on the CA$21.9m 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. After all, LifeSpeak would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if LifeSpeak 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 LifeSpeak had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to CA$50m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months LifeSpeak produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$6.6m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CA$27m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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. For example, we've discovered 4 warning signs for LifeSpeak that you should be aware of before investing here.

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.