Warren Buffett famously said, '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. Importantly, Eqva ASA (OB:EQVA) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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What Is Eqva's Debt?
You can click the graphic below for the historical numbers, but it shows that Eqva had kr211.3m of debt in March 2023, down from kr230.7m, one year before. On the flip side, it has kr48.4m in cash leading to net debt of about kr162.9m.
A Look At Eqva's Liabilities
According to the last reported balance sheet, Eqva had liabilities of kr206.7m due within 12 months, and liabilities of kr199.4m due beyond 12 months. Offsetting this, it had kr48.4m in cash and kr204.9m in receivables that were due within 12 months. So its liabilities total kr152.8m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of kr212.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Eqva'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, Eqva made a loss at the EBIT level, and saw its revenue drop to kr595m, which is a fall of 9.9%. That's not what we would hope to see.
Caveat Emptor
Importantly, Eqva had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr15m 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. Another cause for caution is that is bled kr36m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Eqva is showing 1 warning sign in our investment analysis , you should know about...
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.
About OB:EQVA
Eqva
Provides technical solutions and services to maritime and land based industries in Norway and internationally.
Slight with acceptable track record.