Is Borgestad (OB:BOR) A Risky Investment?

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.' 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 note that Borgestad ASA (OB:BOR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Borgestad

What Is Borgestad's Net Debt?

The chart below, which you can click on for greater detail, shows that Borgestad had kr914.5m in debt in December 2020; about the same as the year before. However, it does have kr61.9m in cash offsetting this, leading to net debt of about kr852.5m.

How Healthy Is Borgestad's Balance Sheet?

The latest balance sheet data shows that Borgestad had liabilities of kr386.6m due within a year, and liabilities of kr764.6m falling due after that. Offsetting these obligations, it had cash of kr61.9m as well as receivables valued at kr150.2m due within 12 months. So its liabilities total kr939.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr189.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Borgestad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Borgestad'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.

Over 12 months, Borgestad made a loss at the EBIT level, and saw its revenue drop to kr839m, which is a fall of 5.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, Borgestad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr11m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through kr44m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Case in point: We've spotted 3 warning signs for Borgestad you should be aware of, and 1 of them is a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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