Is SpineGuard (EPA:ALSGD) Using Debt Sensibly?

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 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. We note that SpineGuard SA (EPA:ALSGD) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for SpineGuard

What Is SpineGuard's Debt?

The image below, which you can click on for greater detail, shows that SpineGuard had debt of €4.15m at the end of June 2022, a reduction from €4.89m over a year. However, it does have €4.45m in cash offsetting this, leading to net cash of €298.2k.

How Strong Is SpineGuard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SpineGuard had liabilities of €3.35m due within 12 months and liabilities of €3.29m due beyond that. Offsetting this, it had €4.45m in cash and €1.34m in receivables that were due within 12 months. So its liabilities total €858.0k more than the combination of its cash and short-term receivables.

Of course, SpineGuard has a market capitalization of €17.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is SpineGuard?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that SpineGuard had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €1.9m and booked a €2.1m accounting loss. With only €298.2k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that SpineGuard is showing 3 warning signs in our investment analysis , you should know about...

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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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.