Is Andfjord Salmon (OB:ANDF) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Andfjord Salmon AS (OB:ANDF) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Andfjord Salmon

What Is Andfjord Salmon's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Andfjord Salmon had kr35.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds kr36.4m in cash, so it actually has kr1.30m net cash.

How Strong Is Andfjord Salmon's Balance Sheet?

We can see from the most recent balance sheet that Andfjord Salmon had liabilities of kr30.0m falling due within a year, and liabilities of kr64.3m due beyond that. Offsetting this, it had kr36.4m in cash and kr15.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr42.6m.

Given Andfjord Salmon has a market capitalization of kr1.31b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Andfjord Salmon boasts net cash, 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 future earnings, more than anything, that will determine Andfjord Salmon's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

It seems likely shareholders hope that Andfjord Salmon can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Andfjord Salmon?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Andfjord Salmon had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr194m and booked a kr33m accounting loss. With only kr1.30m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Andfjord Salmon .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.