Warren Buffett famously said, '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. Importantly, Aspire Global plc (STO:ASPIRE) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Aspire Global Carry?
The chart below, which you can click on for greater detail, shows that Aspire Global had €28.0m in debt in December 2020; about the same as the year before. But on the other hand it also has €28.7m in cash, leading to a €736.0k net cash position.
A Look At Aspire Global's Liabilities
Zooming in on the latest balance sheet data, we can see that Aspire Global had liabilities of €77.1m due within 12 months and liabilities of €19.2m due beyond that. Offsetting these obligations, it had cash of €28.7m as well as receivables valued at €26.2m due within 12 months. So it has liabilities totalling €41.4m more than its cash and near-term receivables, combined.
Given Aspire Global has a market capitalization of €277.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aspire Global also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that Aspire Global grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aspire Global can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aspire Global may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Aspire Global recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While Aspire Global does have more liabilities than liquid assets, it also has net cash of €736.0k. And it impressed us with its EBIT growth of 17% over the last year. So is Aspire Global's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Aspire Global 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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