Health Check: How Prudently Does SpaceandPeople (LON:SAL) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that SpaceandPeople plc (LON:SAL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SpaceandPeople

How Much Debt Does SpaceandPeople Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 SpaceandPeople had UK£1.89m of debt, an increase on UK£1.75m, over one year. However, because it has a cash reserve of UK£760.0k, its net debt is less, at about UK£1.13m.

How Strong Is SpaceandPeople's Balance Sheet?

We can see from the most recent balance sheet that SpaceandPeople had liabilities of UK£4.16m falling due within a year, and liabilities of UK£2.13m due beyond that. Offsetting these obligations, it had cash of UK£760.0k as well as receivables valued at UK£2.04m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£3.50m.

The deficiency here weighs heavily on the UK£2.05m 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. At the end of the day, SpaceandPeople 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 it is future earnings, more than anything, that will determine SpaceandPeople's ability to maintain a healthy balance sheet going forward. 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, SpaceandPeople made a loss at the EBIT level, and saw its revenue drop to UK£2.8m, which is a fall of 43%. That makes us nervous, to say the least.

Caveat Emptor

While SpaceandPeople's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable UK£759k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of UK£974k over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example SpaceandPeople has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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