Health Check: How Prudently Does GreenMobility (CPH:GREENM) Use Debt?

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. As with many other companies GreenMobility A/S (CPH:GREENM) makes use of 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for GreenMobility

What Is GreenMobility's Debt?

As you can see below, GreenMobility had kr.74.2m of debt at June 2023, down from kr.80.4m a year prior. On the flip side, it has kr.12.2m in cash leading to net debt of about kr.61.9m.

A Look At GreenMobility's Liabilities

Zooming in on the latest balance sheet data, we can see that GreenMobility had liabilities of kr.82.0m due within 12 months and liabilities of kr.117.3m due beyond that. Offsetting these obligations, it had cash of kr.12.2m as well as receivables valued at kr.12.4m due within 12 months. So it has liabilities totalling kr.174.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr.178.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is GreenMobility's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year GreenMobility wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to kr.110m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate GreenMobility's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable kr.61m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr.23m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for GreenMobility (2 are concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.