Here's Why Safe Orthopaedics (EPA:ALSAF) Can Afford Some Debt

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 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. We note that Safe Orthopaedics SA (EPA:ALSAF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Safe Orthopaedics

How Much Debt Does Safe Orthopaedics Carry?

The chart below, which you can click on for greater detail, shows that Safe Orthopaedics had €6.84m in debt in December 2020; about the same as the year before. However, it does have €2.44m in cash offsetting this, leading to net debt of about €4.40m.

How Strong Is Safe Orthopaedics' Balance Sheet?

According to the last reported balance sheet, Safe Orthopaedics had liabilities of €5.83m due within 12 months, and liabilities of €8.28m due beyond 12 months. Offsetting these obligations, it had cash of €2.44m as well as receivables valued at €2.94m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.73m.

This deficit isn't so bad because Safe Orthopaedics is worth €20.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Safe Orthopaedics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Safe Orthopaedics had a loss before interest and tax, and actually shrunk its revenue by 22%, to €3.7m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Safe Orthopaedics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €6.7m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €6.5m of cash over the last year. So suffice it to say we consider the stock very 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. For example, we've discovered 6 warning signs for Safe Orthopaedics (3 are significant!) that you should be aware of before investing here.

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.

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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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