Science in Sport (LON:SIS) 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. Importantly, Science in Sport plc (LON:SIS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for Science in Sport

What Is Science in Sport's Net Debt?

As you can see below, at the end of December 2021, Science in Sport had UK£1.50m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has UK£4.85m in cash, leading to a UK£3.35m net cash position.

How Strong Is Science in Sport's Balance Sheet?

The latest balance sheet data shows that Science in Sport had liabilities of UK£15.4m due within a year, and liabilities of UK£14.4m falling due after that. Offsetting these obligations, it had cash of UK£4.85m as well as receivables valued at UK£12.1m due within 12 months. So its liabilities total UK£12.9m more than the combination of its cash and short-term receivables.

Of course, Science in Sport has a market capitalization of UK£72.3m, 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. Despite its noteworthy liabilities, Science in Sport boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Science in Sport can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Science in Sport reported revenue of UK£63m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Science in Sport?

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 Science in Sport had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£6.7m of cash and made a loss of UK£6.8m. But at least it has UK£3.35m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Science in Sport may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Science in Sport has 3 warning signs we think you should be aware of.

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.