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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that SpineGuard SA (EPA:ALSGD) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for SpineGuard
What Is SpineGuard's Debt?
You can click the graphic below for the historical numbers, but it shows that SpineGuard had €5.37m of debt in June 2020, down from €6.29m, one year before. However, it also had €1.19m in cash, and so its net debt is €4.18m.
How Strong Is SpineGuard's Balance Sheet?
We can see from the most recent balance sheet that SpineGuard had liabilities of €6.25m falling due within a year, and liabilities of €1.69m due beyond that. Offsetting this, it had €1.19m in cash and €982.5k in receivables that were due within 12 months. So it has liabilities totalling €5.77m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €2.97m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, SpineGuard 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 SpineGuard 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.
Over 12 months, SpineGuard made a loss at the EBIT level, and saw its revenue drop to €5.7m, which is a fall of 23%. To be frank that doesn't bode well.
Caveat Emptor
Not only did SpineGuard's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €460k. 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. It's fair to say the loss of €1.3m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Case in point: We've spotted 2 warning signs for SpineGuard you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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About ENXTPA:ALSGD
SpineGuard
Provides designs, develops, and markets medical devices for spine worldwide.
Medium-low with adequate balance sheet.
