Is SpaceandPeople (LON:SAL) Weighed On By Its Debt Load?

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.' 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. As with many other companies SpaceandPeople plc (LON:SAL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SpaceandPeople

What Is SpaceandPeople's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 SpaceandPeople had debt of UK£1.54m, up from UK£750.0k in one year. On the flip side, it has UK£839.0k in cash leading to net debt of about UK£705.0k.

How Strong Is SpaceandPeople's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SpaceandPeople had liabilities of UK£5.19m due within 12 months and liabilities of UK£1.24m due beyond that. On the other hand, it had cash of UK£839.0k and UK£2.17m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£3.43m.

When you consider that this deficiency exceeds the company's UK£2.64m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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 64%. To be frank that doesn't bode well.

Caveat Emptor

Not only did SpaceandPeople's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£2.1m 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 burned through UK£1.2m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with SpaceandPeople (including 2 which are potentially serious) .

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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