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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Inner Spirit Holdings Ltd. (CNSX:ISH) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Inner Spirit Holdings
What Is Inner Spirit Holdings's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Inner Spirit Holdings had debt of CA$8.00m, up from none in one year. However, it also had CA$7.90m in cash, and so its net debt is CA$96.4k.
How Healthy Is Inner Spirit Holdings's Balance Sheet?
The latest balance sheet data shows that Inner Spirit Holdings had liabilities of CA$3.41m due within a year, and liabilities of CA$18.7m falling due after that. Offsetting these obligations, it had cash of CA$7.90m as well as receivables valued at CA$1.32m due within 12 months. So it has liabilities totalling CA$12.9m more than its cash and near-term receivables, combined.
Inner Spirit Holdings has a market capitalization of CA$35.1m, 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. But either way, Inner Spirit Holdings has virtually no net debt, 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 it is Inner Spirit Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Inner Spirit Holdings reported revenue of CA$6.6m, which is a gain of 15%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.