Health Check: How Prudently Does Andfjord Salmon (OB:ANDF) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Andfjord Salmon AS (OB:ANDF) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Andfjord Salmon

How Much Debt Does Andfjord Salmon Carry?

The image below, which you can click on for greater detail, shows that Andfjord Salmon had debt of kr69.0m at the end of September 2023, a reduction from kr84.1m over a year. But on the other hand it also has kr526.3m in cash, leading to a kr457.3m net cash position.

A Look At Andfjord Salmon's Liabilities

Zooming in on the latest balance sheet data, we can see that Andfjord Salmon had liabilities of kr37.6m due within 12 months and liabilities of kr70.9m due beyond that. Offsetting this, it had kr526.3m in cash and kr201.0k in receivables that were due within 12 months. So it can boast kr418.0m more liquid assets than total liabilities.

This surplus suggests that Andfjord Salmon is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Andfjord Salmon has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Andfjord Salmon'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 Andfjord Salmon managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Andfjord Salmon?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Andfjord Salmon lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr138m of cash and made a loss of kr79m. Given it only has net cash of kr457.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Andfjord Salmon (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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. 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.