Health Check: How Prudently Does Spartoo SAS (EPA:ALSPT) Use Debt?

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. As with many other companies Spartoo SAS (EPA:ALSPT) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Spartoo SAS

What Is Spartoo SAS's Debt?

The chart below, which you can click on for greater detail, shows that Spartoo SAS had €25.4m in debt in June 2024; about the same as the year before. However, it does have €10.8m in cash offsetting this, leading to net debt of about €14.6m.

How Healthy Is Spartoo SAS' Balance Sheet?

We can see from the most recent balance sheet that Spartoo SAS had liabilities of €32.1m falling due within a year, and liabilities of €26.1m due beyond that. Offsetting this, it had €10.8m in cash and €10.2m in receivables that were due within 12 months. So it has liabilities totalling €37.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €6.54m 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'd watch its balance sheet closely, without a doubt. After all, Spartoo SAS 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 Spartoo SAS 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 Spartoo SAS had a loss before interest and tax, and actually shrunk its revenue by 8.7%, to €135m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Spartoo SAS produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €339k. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost €1.1m 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Spartoo SAS you should be aware of, and 1 of them is significant.

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.