Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SpineGuard SA (EPA:ALSGD) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does SpineGuard Carry?
The image below, which you can click on for greater detail, shows that SpineGuard had debt of €4.47m at the end of December 2021, a reduction from €5.39m over a year. But on the other hand it also has €5.21m in cash, leading to a €734.5k net cash position.
A Look At SpineGuard's Liabilities
Zooming in on the latest balance sheet data, we can see that SpineGuard had liabilities of €3.19m due within 12 months and liabilities of €3.66m due beyond that. On the other hand, it had cash of €5.21m and €1.19m worth of receivables due within a year. So it has liabilities totalling €454.9k more than its cash and near-term receivables, combined.
This state of affairs indicates that SpineGuard's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €25.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, SpineGuard also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is SpineGuard's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year SpineGuard had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to €4.4m. That's not what we would hope to see.
So How Risky Is SpineGuard?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SpineGuard had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €1.5m and booked a €1.7m accounting loss. Given it only has net cash of €734.5k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for SpineGuard you should be aware of.
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.