Spineway Société Anonyme (EPA:ALSPW) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Spineway Société Anonyme (EPA:ALSPW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Spineway Société Anonyme

What Is Spineway Société Anonyme's Net Debt?

As you can see below, Spineway Société Anonyme had €2.58m of debt at June 2021, down from €3.55m a year prior. But on the other hand it also has €14.3m in cash, leading to a €11.7m net cash position.

How Healthy Is Spineway Société Anonyme's Balance Sheet?

We can see from the most recent balance sheet that Spineway Société Anonyme had liabilities of €3.60m falling due within a year, and liabilities of €1.67m due beyond that. Offsetting this, it had €14.3m in cash and €1.95m in receivables that were due within 12 months. So it can boast €11.0m more liquid assets than total liabilities.

This surplus strongly suggests that Spineway Société Anonyme has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Spineway Société Anonyme has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Spineway Société Anonyme's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Spineway Société Anonyme reported revenue of €5.0m, which is a gain of 4.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Spineway Société Anonyme?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Spineway Société Anonyme lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €2.2m and booked a €2.7m accounting loss. Given it only has net cash of €11.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Spineway Société Anonyme (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.