Health Check: How Prudently Does 1Spatial (LON:SPA) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that 1Spatial Plc (LON:SPA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 1Spatial

What Is 1Spatial's Debt?

As you can see below, at the end of July 2020, 1Spatial had UK£3.14m of debt, up from UK£732.0k a year ago. Click the image for more detail. But it also has UK£6.57m in cash to offset that, meaning it has UK£3.43m net cash.

A Look At 1Spatial's Liabilities

According to the last reported balance sheet, 1Spatial had liabilities of UK£13.1m due within 12 months, and liabilities of UK£6.70m due beyond 12 months. Offsetting these obligations, it had cash of UK£6.57m as well as receivables valued at UK£5.17m due within 12 months. So its liabilities total UK£8.07m more than the combination of its cash and short-term receivables.

1Spatial has a market capitalization of UK£30.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, 1Spatial boasts net cash, so it's fair to say it does not have a heavy debt load! 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 1Spatial's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year 1Spatial wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to UK£24m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is 1Spatial?

While 1Spatial lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£1.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for 1Spatial shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - 1Spatial has 2 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. 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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