LoopUp Group (LON:LOOP) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that LoopUp Group plc (LON:LOOP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 LoopUp Group

What Is LoopUp Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that LoopUp Group had UK£6.44m of debt in June 2023, down from UK£8.65m, one year before. However, because it has a cash reserve of UK£885.0k, its net debt is less, at about UK£5.56m.

A Look At LoopUp Group's Liabilities

According to the last reported balance sheet, LoopUp Group had liabilities of UK£12.1m due within 12 months, and liabilities of UK£5.42m due beyond 12 months. Offsetting this, it had UK£885.0k in cash and UK£6.88m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£9.75m.

The deficiency here weighs heavily on the UK£5.02m 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 definitely think shareholders need to watch this one closely. After all, LoopUp Group 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 you can't view debt in total isolation; since LoopUp Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year LoopUp Group wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to UK£22m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, LoopUp Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£5.6m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of UK£16m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for LoopUp Group (3 shouldn't be ignored) you should be aware of.

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.