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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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that 1Spatial Plc (LON:SPA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does 1Spatial Carry?
The image below, which you can click on for greater detail, shows that at July 2020 1Spatial had debt of UK£3.14m, up from UK£732.0k in one year. But it also has UK£6.57m in cash to offset that, meaning it has UK£3.43m net cash.
How Healthy Is 1Spatial's Balance Sheet?
We can see from the most recent balance sheet that 1Spatial had liabilities of UK£13.1m falling due within a year, and liabilities of UK£6.70m due beyond that. On the other hand, it had cash of UK£6.57m and UK£5.17m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£8.07m.
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. While it does have liabilities worth noting, 1Spatial also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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. With any luck the company will be able to grow its way to profitability.
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£1.7m. 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. The good news for 1Spatial shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - 1Spatial has 2 warning signs we think you should be aware of.
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.
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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