Would Tekna Holding (OB:TEKNA) Be Better Off With Less Debt?

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.' 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. Importantly, Tekna Holding ASA (OB:TEKNA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tekna Holding

What Is Tekna Holding's Debt?

As you can see below, at the end of March 2024, Tekna Holding had CA$30.8m of debt, up from CA$6.97m a year ago. Click the image for more detail. On the flip side, it has CA$10.0m in cash leading to net debt of about CA$20.8m.

A Look At Tekna Holding's Liabilities

According to the last reported balance sheet, Tekna Holding had liabilities of CA$11.2m due within 12 months, and liabilities of CA$32.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$10.0m as well as receivables valued at CA$13.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$19.7m.

Tekna Holding has a market capitalization of CA$98.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tekna Holding'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.

In the last year Tekna Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to CA$40m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Tekna Holding still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$13m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$21m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 5 warning signs for Tekna Holding (2 are a bit concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com