Is Trakm8 Holdings (LON:TRAK) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Trakm8 Holdings PLC (LON:TRAK) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Trakm8 Holdings

What Is Trakm8 Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Trakm8 Holdings had UK£7.07m of debt, an increase on UK£6.53m, over one year. However, it also had UK£1.17m in cash, and so its net debt is UK£5.90m.

How Healthy Is Trakm8 Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trakm8 Holdings had liabilities of UK£10.2m due within 12 months and liabilities of UK£8.62m due beyond that. Offsetting this, it had UK£1.17m in cash and UK£8.31m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£9.32m.

When you consider that this deficiency exceeds the company's UK£7.50m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Trakm8 Holdings'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.

Over 12 months, Trakm8 Holdings reported revenue of UK£18m, which is a gain of 2.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Trakm8 Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at UK£526k. When we look at that alongside the significant liabilities, we're not particularly confident 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£1.9m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. We've identified 1 warning sign with Trakm8 Holdings , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.