Is SpaceandPeople (LON:SAL) Using Too Much 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 SpaceandPeople plc (LON:SAL) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SpaceandPeople

How Much Debt Does SpaceandPeople Carry?

The image below, which you can click on for greater detail, shows that at June 2020 SpaceandPeople had debt of UK£1.54m, up from UK£500.0k in one year. But it also has UK£1.73m in cash to offset that, meaning it has UK£185.0k net cash.

How Strong Is SpaceandPeople's Balance Sheet?

According to the last reported balance sheet, SpaceandPeople had liabilities of UK£2.96m due within 12 months, and liabilities of UK£2.02m due beyond 12 months. On the other hand, it had cash of UK£1.73m and UK£1.49m worth of receivables due within a year. So it has liabilities totalling UK£1.77m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of UK£2.54m, so it does suggest shareholders should keep an eye on SpaceandPeople's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, SpaceandPeople boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is SpaceandPeople's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SpaceandPeople had a loss before interest and tax, and actually shrunk its revenue by 37%, to UK£5.0m. To be frank that doesn't bode well.

So How Risky Is SpaceandPeople?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months SpaceandPeople lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£249k and booked a UK£1.8m accounting loss. With only UK£185.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 3 warning signs for SpaceandPeople you should be aware of, and 2 of them make us uncomfortable.

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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