Here's Why Hofseth BioCare (OB:HBC) Can Afford Some 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. As with many other companies Hofseth BioCare ASA (OB:HBC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hofseth BioCare

How Much Debt Does Hofseth BioCare Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Hofseth BioCare had debt of kr104.2m, up from kr26.2m in one year. However, it also had kr32.4m in cash, and so its net debt is kr71.7m.

How Healthy Is Hofseth BioCare's Balance Sheet?

The latest balance sheet data shows that Hofseth BioCare had liabilities of kr172.2m due within a year, and liabilities of kr90.8m falling due after that. On the other hand, it had cash of kr32.4m and kr14.1m worth of receivables due within a year. So it has liabilities totalling kr216.5m more than its cash and near-term receivables, combined.

Hofseth BioCare has a market capitalization of kr1.02b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hofseth BioCare'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 Hofseth BioCare wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to kr120m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Hofseth BioCare's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping kr129m. 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. However, it doesn't help that it burned through kr115m of cash over the last year. 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. To that end, you should learn about the 4 warning signs we've spotted with Hofseth BioCare (including 2 which are potentially serious) .

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.