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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that 1Spatial Plc (LON:SPA) does use debt in its business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for 1Spatial

What Is 1Spatial's Net Debt?

As you can see below, 1Spatial had UK£2.69m of debt at July 2021, down from UK£3.14m a year prior. However, its balance sheet shows it holds UK£5.49m in cash, so it actually has UK£2.81m net cash.

A Look At 1Spatial's Liabilities

According to the last reported balance sheet, 1Spatial had liabilities of UK£11.8m due within 12 months, and liabilities of UK£6.29m due beyond 12 months. Offsetting these obligations, it had cash of UK£5.49m as well as receivables valued at UK£4.65m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£7.93m.

Of course, 1Spatial has a market capitalization of UK£55.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, 1Spatial 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 ultimately the future profitability of the business will decide if 1Spatial can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, 1Spatial reported revenue of UK£26m, which is a gain of 5.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is 1Spatial?

Although 1Spatial had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£603k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for 1Spatial 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.

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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.